Give your finances a proper stress test

If there were a crash tomorrow, could your finances handle it? writes Anthony Keane

LOW interest rates and rising asset prices have raised the risk of nasty surprises, prompting warnings for Australians to make sure their finances can handle shortterm pain.

A good way to do this is with broad and regular stress tests that span your investments, ability to repay debts, emergency funds and insurance, specialists say.

Gryphon Capital Investments believes many investors have not stresstested their portfolios and are overexposed to shares and property, particularly in today’s “high- risk environment”.

People can stress test their investments by calculating their value, how concentrated they are in one area such as property or shares, and what would happen if they fell sharply.

Gryphon founding partner Ashley Burtenshaw said a guide could be a 40 per cent fall in house prices, which was the stress test sculpted by financial regulators for lenders mortgage insurers a few years ago.

Aussie shares fell 55 per cent during the global financial crisis – so that’s another guide.

Mr Burtenshaw said a period of easy money and “extraordinarily low inflation” was giving way to rising inflation that could cause asset prices to fall.

He suggested holding assets that were uncorrelated to property and shares, such as cash and fixed income.

“The traits of these assets are highly defensive in nature due to the lower returns on offer coupled with the very high probability of receiving your capital back.”

Gryphon is raising up to $ 350 million from investors for a new listed investment trust that will hold a diverse range of fixed income bonds. Unlike traditional bond funds that fall when interest rates rise, Gryphon’s investments were “typically 100 per cent floating rate securities” and avoided this risk, Mr Burtenshaw said.

Catapult Wealth director Tony Catt said stress tests were vital. “You need to do it from a number of angles, including from a cash flow angle,” he said.

“If interest rates were 6 per cent ( rather than 4 per cent) what would your cash flow look like? What would it look like if you lost a job or a tenant?” Work out how much money you pay each week to service debt. If it’s more than 30 or 40 per cent of your overall income, there’s potential danger. Do you have funds for an emergency? People approaching retirement can work out their expected income using free online calculators such as moneysmart. gov. au’s, and apply scenarios such as a 20 per cent drop in their nest egg. Mr Catt said people with high debt levels, high- risk jobs or high- risk investments should stress test more than once a year. “Know what your plan B is, and your plan C,” he said.