Can Your Portfolio Survive the Lost Decade? Mine Did (With Backtesting)!

In my previous post, I discussed using a 5.5% return to sustain a consistent drawdown for retirement expenses, primarily through investments in index funds or ETFs. In this post, I’ll dive into how I’m currently implementing this strategy as I prepare for my future retirement.

Since this is my retirement fund, ensuring its resilience during economic downturns is critical. For instance, it’s essential that the portfolio remains sustainable even during harsh periods like the "Lost Decade", a time when the return of the S&P 500 was Negative. To address this, I will be backtesting my portfolio against this worst-case scenario in market history. This helps me evaluate its performance during extended periods of low or negative returns, ensuring that my strategy is robust enough to withstand such challenges. I’ll also explain why this portfolio is particularly suitable for my retirement goals.

My Retirement-Ready Portfolio: A 50/50 Mix That Works

The “Lost Decade for Stocks” refers to the ten years from December 31, 1999, to December 31, 2009, when the S&P 500 delivered an annualized total return of -0.9%. This marked only the second time in history the U.S. stock market experienced a negative decade, the first being during the Great Depression.

Before we begin the backtest, let me outline the structure of my portfolio. It follows a balanced approach with a 50% allocation to equities and 50% to bonds. However, within each of the component, it is further diversify. 

The diagram below shows the construct of the portfolio. Do note that these are not the exact tickers which I have bought except for QQQ, due to the US estate duty and taxes. I am using these tickers below because the website that I am using for backtesting only have these from the US.

As illustrated in the diagram below, this portfolio delivers a return of 4.43%, in contrast to the negative return seen in the S&P 500 during this difficult period. And importantly, the volatility is within moderate range, a balanced one for a retirement portfolio. Since this portfolio is designed for retirement, it's crucial that the volatility isn’t too high, which could pose unnecessary risks, or too low, which may limit growth potential.

Stress Testing My Portfolio: Will It Survive

Imagine someone retire with $430k (read previous post how this amount is derived) thinking that all is good for his retirement at age 65. But just as he is about to settle into retirement, he is face the unfortunate timing of entering the "Lost Decade. Super unlucky.

Over the next 10 years, as shown in the diagram above, the portfolio generates an annual return of only 4.43%. With an annual withdrawal of $23,520 to cover expenses, the portfolio’s balance would decrease to $375,238.02 by the end of the decade.

After enduring the worst period, the portfolio begins to recover. For the remaining 25 years of his life, withdrawals continue from the remaining balance. As shown in the diagram below, even with consistent drawdowns, the portfolio holds steady and even have a healthy balance. And yes, it survive. On the flip side, he could have spend more and die with zero :)

This is not a financial advice.