Scenario analysis for a family's full balance sheet

Define the decision and the balance-sheet boundary

Choose the question before constructing a shock: can distributions continue, can capital calls be met, or would a new allocation increase forced-sale risk? Set a horizon and identify the entities covered. Include investment accounts, business interests, unfunded commitments, borrowing, guarantees, and planned spending. Record missing exposures and valuation dates instead of treating unavailable information as zero risk.

A scenario for a securities account alone may miss the family's largest economic exposure. Conversely, a rough operating-business estimate should not be presented with the precision of a quoted security. Use ranges or separate qualitative findings where necessary. UBS's family investment-policy discussion provides a governance context for considering objectives and risk across assets; the scenario should support those decisions rather than become an isolated analytical exhibit.

Make the shock coherent and explicit

Specify changes in relevant rates, spreads, equities, currencies, volatility, and business conditions, together with their timing. Explain the economic narrative connecting them. MSCI's predictive stress-testing framework distinguishes defining a consistent scenario from propagating it to portfolio risk factors. That distinction helps reviewers challenge both the story and the translation into losses instead of accepting a single black-box number.

In a hypothetical recession scenario, equity weakness coincides with reduced business distributions, slower private-fund realizations, and tighter financing. Those are assumptions to test, not forecasts. Avoid independently selecting the worst historical move in every factor and labeling the combination a plausible historical event. An extreme synthetic combination can still be useful, but it must be identified and interpreted as such.

Choose the scenario type for the question

This original comparison separates four complementary exercises. No single row substitutes for the others. A familiar crisis replay can make a discussion concrete while missing risks unique to today's holdings. A reverse stress can expose a threshold without saying how likely the threshold is to be reached.

Build a cash timeline alongside valuation losses

List cash needs by date and legal entity, then identify resources actually available on those dates. Distinguish cash balances, expected distributions, sale proceeds, and conditional borrowing. Account for settlement, notice periods, collateral haircuts, and transfer restrictions. J.P. Morgan's family-office liquidity discussion emphasizes accessible rather than merely owned assets. A portfolio can remain wealthy on paper while facing a near-term funding problem.

In a hypothetical one-month stress, an entity has USD 8 million cash and USD 11 million of obligations. It expects USD 4 million of distributions, but the scenario delays all of them. The immediate shortfall is USD 3 million before transaction costs or other inflows. An advertised credit limit does not automatically close that gap: test committed availability, collateral requirements, and who can authorize borrowing.

Challenge models, proxies, and proposed responses

Identify nonlinear instruments, embedded leverage, illiquid holdings, and exposures estimated from proxies. Simple linear sensitivities may become unreliable for large shocks. Test different correlation assumptions and valuation ranges without choosing only the combination that supports the preferred allocation. If private valuations update slowly, distinguish reporting delay from reduced economic sensitivity. A smooth reported history does not establish resilience to the scenario.

Evaluate responses under the stressed conditions themselves. A hypothetical hedge purchase may be expensive or unavailable after the shock begins; a hypothetical asset sale may require a discount. Label simulated transactions as assumptions, not actual executions. A model's historical study and live research publications can inform the discussion, but only documented investment executions establish what an account actually achieved during a real event.

Attach actions to vulnerabilities without claiming certainty

Report the exposures driving loss, the timing of cash pressure, the assumptions that matter most, and feasible choices. Separate actions that can be approved now from contingent actions requiring later authority. Assign owners to verify borrowing terms, update commitment schedules, or obtain missing holdings. Repeat the analysis when exposures or family obligations change, not only at a calendar anniversary.

Failure cases include double-counting the same cash reserve, assuming every credit line remains available, and allowing an optimistic sale price to rescue the result. Another is assigning an unsupported probability to a vividly described scenario. Record what the exercise cannot measure. A good committee conclusion identifies vulnerability and preparedness under stated conditions; it does not announce that a portfolio is safe because a small set of scenarios passed.

Sources and further reading

1. MSCI: Building Predictive Stress Tests, MSCI's Best Practices
2. J.P. Morgan Private Bank: The hidden balance sheet, finding more liquidity opportunities
3. UBS: The role of investment policy statements in family wealth

The linked sources provide conceptual background. The worked examples and planning assumptions on this page are this publication's own illustrations.

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