One of the many lessons the financial crisis taught us was the need for more circumspection about the health of the financial system as a whole. If we are to serve our clients well, we must look at the markets as they have performed and as they will perform over many years.
Looking at the financials over two to three years is insufficient. It will not provide a complete picture. Instead, responsibility to the needs of our clients implies that we must analyze a twenty year history of market fluctuation. Moreover, best practices demand that we project twenty years into the future in order to prepare for shocks to the system as much as possible.
It is customary to perform stress tests but experience has shown that the tests officials executed before the Great Recession were not equal to the challenge. Instead, we should test for volatility across many regimes, not just with respect to isolated events.
It is imperative for a firm to consider what will happen when many firms take the same risk management measures at the same time. History tells us this kind of convergence is a recipe for sharply increased volatility.
For more information on this subject, please consult this webpage.
Find out more about Fern Software solutions, click here to request for our brochures for free!