Stress-Testing Your XEQT Portfolio: What Happens in the Worst-Case Scenarios

Everyone talks about what XEQT can do for you in the best case. This post is about the worst case.

I think this is important, because the best time to think about bad outcomes is when you’re calm and rational – not when your portfolio is down 35% and you’re pacing around your apartment at 2am wondering if you should sell everything and move it to GICs.

I’m going to stress-test XEQT against six different nightmare scenarios, using historical data and reasonable projections. For each one, I’ll show you what would happen to your portfolio, how long recovery would take, and what an investor who stayed the course would have experienced.

The goal isn’t to scare you. It’s to prepare you. Because the investors who perform best over the long term are the ones who’ve already imagined the worst and decided in advance what they’ll do.

Scenario 1: A 2008-Style Financial Crisis

What happened: The U.S. housing market collapsed, major banks failed, credit markets froze, and global stock markets fell roughly 50-55% from peak to trough between October 2007 and March 2009.

What would happen to your XEQT portfolio:

That table is uncomfortable to look at. A $100,000 portfolio becoming $45,000 isn’t abstract – it’s seeing five years of contributions evaporate on screen.

The recovery: A globally diversified equity portfolio recovered to its pre-crisis peak in approximately 4.5 years (by mid-2013). An investor who continued making regular contributions recovered significantly faster, because they were buying shares throughout the decline and early recovery at deeply discounted prices.

What actually happened to disciplined investors: Someone who invested $500/month throughout the entire 2008-09 crisis and subsequent recovery came out dramatically ahead. The shares purchased at depressed prices during 2008-2009 produced some of the best returns of their entire investing career.

Key insight: The 2008 crisis was the worst financial event since the Great Depression. It was terrifying, unprecedented, and generated years of doom-filled commentary about the end of capitalism. Markets fully recovered and went on to deliver one of the longest bull runs in history.

Scenario 2: A Japan-Style Lost Decade (or Two)

What happened: Japan’s stock market (Nikkei 225) peaked in December 1989 and didn’t recover to that level until February 2024 – roughly 34 years later. An investor who bought Japanese stocks at the peak in 1989 waited over three decades to break even.

Could this happen to XEQT?

This is the scenario that keeps thoughtful investors up at night. But there are critical differences between Japan’s situation and XEQT:

The key difference is diversification. Japan’s lost decades were a single-country phenomenon. During the same period that Japanese stocks went nowhere, U.S. stocks delivered roughly 10%+ annualized returns. European stocks delivered 7-8%. Emerging markets delivered strong returns.

If an investor held a globally diversified portfolio (similar to XEQT) throughout Japan’s lost decades, their returns would have been strong, because Japan represents only about 5-6% of global market capitalization.

What a Japan-like scenario would actually look like for XEQT: It would require multiple major economies – the U.S., Europe, China, Canada – to simultaneously enter extended stagnation. This hasn’t happened in modern economic history. It’s not impossible, but it would require a confluence of negative factors unprecedented in scope.

Even in this nightmare scenario: If global equities delivered only 3-4% annualized returns for a decade (roughly half the historical average), an investor contributing $500/month would still accumulate approximately $70,000-$80,000 over 10 years. Not great, but not devastating either. And historically, periods of below-average returns are followed by periods of above-average returns, as valuations revert to the mean.

Scenario 3: Runaway Inflation (1970s-Style Stagflation)

What happened: In the 1970s, the U.S. and Canada experienced sustained high inflation (10%+), stagnant economic growth, and high unemployment simultaneously. Stock markets delivered positive nominal returns but negative real (inflation-adjusted) returns for much of the decade.

What would happen to your XEQT portfolio:

During the 1970s stagflation period, global equities delivered roughly 6-7% nominal returns per year, but inflation was running at 8-12%. In real terms, investors were losing purchasing power despite positive portfolio growth.

A decade of -4% real returns would feel terrible. Your portfolio would grow in dollar terms, but your purchasing power would shrink.

But here’s the important context:

1. Stocks eventually caught up. The early 1980s produced some of the strongest equity returns in history as inflation was tamed and valuations were compressed. The 1970s set the stage for exceptional returns in the following decade.

2. XEQT includes natural inflation hedges. Energy companies (roughly 6% of XEQT) tend to benefit from inflation. Banks (significant portion of the financials allocation) benefit from rising interest rates. Companies with pricing power can pass cost increases to consumers.

3. Equities still outperformed bonds and cash during the 1970s. While stocks delivered mediocre real returns, bonds and cash delivered even worse real returns. XEQT’s 100% equity allocation would have been the least-bad option.

4. Geographic diversification helps. Different countries experienced inflation at different rates and times. XEQT’s exposure to 49 countries provides natural diversification against any single country’s inflationary spiral.

Scenario 4: A Global Pandemic Worse Than COVID

What happened with COVID: Global equities fell approximately 34% in about five weeks (February-March 2020), then recovered to previous highs within about five months.

What if the pandemic were worse?

Imagine a scenario with:

• Longer lockdowns (6-12 months instead of 2-3 months)
• Higher mortality that permanently reduced the workforce
• Supply chain disruptions lasting years
• A slower, more uneven recovery

Estimated impact: A prolonged pandemic scenario might produce a 40-50% decline (similar to 2008 rather than COVID’s 34%) with a recovery timeline of 2-4 years instead of 5 months.

What XEQT investors should know:

The 1918 Spanish Flu killed an estimated 50-100 million people worldwide, and the Dow Jones Industrial Average actually rose over the course of the pandemic (1918-1919). Stock markets are remarkably resilient even in catastrophic scenarios because companies adapt, innovate, and rebuild.

XEQT’s diversification across 9,000+ companies means that even if entire industries are devastated (airlines, hospitality, retail), other industries benefit (technology, healthcare, logistics). The fund’s structure naturally shifts toward what’s working.

Scenario 5: A Major Geopolitical Conflict

What if: A major military conflict between great powers (not a proxy war, but a direct confrontation). Markets would react with extreme volatility.

Historical precedent:

Key insight: Markets have traded through two world wars, dozens of regional conflicts, nuclear standoffs, and multiple invasions. The reaction is typically sharp and short-lived, because markets quickly price in the new reality and refocus on corporate fundamentals.

A modern great-power conflict would likely cause a severe but temporary market dislocation. The XEQT investor’s playbook remains the same: don’t sell, keep contributing, and recognize that human beings have navigated far worse situations without permanent destruction of economic value.

The scenario where XEQT goes to zero: A global nuclear war that destroys industrial civilization. In this scenario, your portfolio is irrelevant because money has no meaning. If you find yourself planning for this scenario, the answer is canned goods and water purification, not portfolio reallocation.

Scenario 6: A Prolonged Bear Market (Slow Bleed)

What happened: Unlike a crash (fast, dramatic), a slow bear market grinds lower over months or years. The 2000-2002 dot-com bust was this type: markets peaked in March 2000 and didn’t bottom until October 2002 – a slow, painful 30-month decline of roughly 49%.

Why slow bear markets are psychologically harder:

A crash (like COVID) is over quickly. You feel pain, but the sharp recovery provides relief. A slow bear market erodes your confidence over months and years. Every time you think “maybe the bottom is in,” it drops another 5%. The temptation to sell grows every month.

What a 2000-2002 scenario would look like for XEQT:

Imagine watching your $100,000 portfolio shrink to $51,000 over two and a half years. That’s brutal. And during those 30 months, the financial news was relentlessly negative. Every analyst had a theory about why the market would keep falling.

But here’s what happened next: From the October 2002 bottom, global equities roughly doubled over the next 5 years. An investor who held through the entire decline and continued contributing recovered faster than someone who sold at any point during the downturn.

The XEQT advantage in slow bear markets: Because XEQT is globally diversified, it’s less vulnerable to single-market slow bleeds. The dot-com bust was primarily a U.S. technology phenomenon. International markets fared better. XEQT’s allocation to Canada, Europe, Asia, and emerging markets provides ballast when one market is declining slowly.

The Meta-Lesson: Your Biggest Risk Isn’t Any of These Scenarios

After stress-testing XEQT against every nightmare scenario I can think of, one conclusion stands out: in every single case, the investor who stayed the course came out ahead of the investor who sold.

The real risk isn’t:

• A market crash (temporary)
• A recession (cyclical)
• Inflation (stocks eventually adjust)
• A geopolitical crisis (markets have traded through every war in history)

The real risk is you. Your emotions, your reactions, your impulse to “do something” when doing nothing is the optimal strategy.

Here’s the data that should end the debate:

The spread between selling in panic and staying disciplined is roughly 5-7% per year over the long term. On a $100,000 portfolio over 20 years, that’s the difference between ending with $200,000 and ending with $670,000.

Your behavior during market stress is worth hundreds of thousands of dollars over a lifetime. This is why we stress-test: not to predict the future, but to build the psychological resilience to handle whatever comes.

The Stress-Test Summary

Notice a pattern? The answer is always the same.

It doesn’t matter what scenario materializes. XEQT’s global diversification, low costs, and automatic rebalancing make it resilient to every historical catastrophe we can examine. And the investor behavior that maximizes outcomes is always: hold and keep contributing.

What If You Can’t Stomach These Scenarios?

If reading through these stress tests made you genuinely uncomfortable – if the idea of a 50% decline makes you certain you’d sell – that’s valuable information.

It means XEQT might not be the right fit for your risk tolerance, and that’s okay. Here are alternatives:

The best portfolio isn’t the one with the highest expected return. It’s the one you’ll actually stick with through the worst moments. If XEQT’s volatility would cause you to sell during a crash, a lower-risk option that you hold through the storm will outperform.

Honest self-assessment is more valuable than optimism.

How to Use This Stress Test

Bookmark this page. When the next market downturn hits – and it will – come back and read it.

Find the scenario that most closely matches what’s happening. Look at the historical precedent. Look at the recovery timeline. Remind yourself that every crisis in the history of global markets has eventually ended, and that the investors who held through them came out ahead.

Then close this page, keep your automatic contributions running, and go do something that actually matters to you.

The math is on your side. The history is on your side. The only thing that can beat you is yourself.