Reading a stress test

Value at Risk describes an ordinary bad day. A stress test asks a sharper question: if a particular crisis happened again, starting now, what would it do to what I hold today?

Sentinel ships a library of scenarios drawn from real episodes, such as the 2008 financial crisis, the COVID crash of March 2020 and a sharp rise in interest rates. Each one is a set of shocks: equities down by so much, bonds up or down by so much, and so on. The test applies those shocks to your current holdings and reports the estimated loss.

How to read the result

• The headline loss is the estimated hit to the whole portfolio. Read it next to your Value at Risk: a stress loss many times larger than your daily VaR means your ordinary days are not telling you much about your bad ones.
• The per-holding breakdown shows where the damage comes from. Often two or three positions carry most of it.
• Several scenarios at once tell you whether you are fragile to one kind of shock or to all of them.

Writing your own

The library cannot know what you are worried about. On Analyst you can write a scenario of your own, combine several at once, and override the shock for a single holding if you think it would behave differently from its sector. If you hold a lot of one company, a scenario that halves that one name is often more useful than any historical replay.

What a stress test leaves out

These are stylised replays. They apply the size of past shocks to today's positions; they do not model every second-order effect, and a future crisis will not copy a past one exactly. Use them to find where you are fragile, not to predict a number to the euro. Sentinel does not tell you what to do about what you find; that decision is yours or your adviser's.