Stress-Testing a Portfolio: Monte Carlo Crisis, Bear and Bull Scenarios
A single expected-return number says almost nothing about what holding a portfolio feels like. The same five holdings can sail through one decade and lose a third of their value in a different one — the outcome is a distribution, not a point. Monte Carlo simulation makes that distribution visible: thousands of hypothetical paths through crisis, bear and bull regimes calibrated on the portfolio’s own history.
The interesting part is comparing two versions of the same portfolio — as it is, and rebalanced toward better diversification — across the same simulated futures. The trade-off is honest: the cushion in bad regimes is paid for with upside in good ones. Below, one real run of the simulation, with every number computed.
Three futures for one portfolio
A portfolio’s real test isn’t the average year — it’s the bad one. Slowio’s scenario simulator runs 3,000 simulated paths for a portfolio in each of three market regimes — a crisis, a bear market and a bull market — each calibrated from the portfolio’s own worst, weakest and strongest historical stretches. It runs two portfolios side by side: the current, concentrated mix (“Current”) and the Max Diversification optimizer’s spread (“Optimal”). A simulation is a range of hypothetical outcomes under stated assumptions — not a prediction.
The demo portfolio looks diversified — five holdings across stocks, an index fund, gold and bonds — but AAPL alone is 72% of the money and about 78% of the risk. Here is what a crash does to it, indexed to 100 at the start.
In the crisis scenario the concentrated portfolio’s median path lands near -20% after a worst-case dip of about 50% along the way, and ends underwater in 70% of the runs. The diversified mix takes a much gentler 23% dip, lands near +5%, and is underwater in 40% of them. Same shock, far less damage — because the loss isn’t riding on a single name.
23% max-div worst crisis dip (was 50%) | 40% crisis chance of a loss (was 70%) | 1.7 diversification ratio (was 1.2) |
The whole trade, in one picture
The distribution of end results tells the whole trade. In the crisis and bear panels the diversified mix (green) clusters higher — fewer deep losses. In the bull panel the concentrated one (orange) keeps the long right tail: its median boom of +331% beats the diversified +148%. That upside is the price of the protection — diversification isn’t free, it’s a trade.
A steadier ride in every scenario
And the worst-case dip — the deepest fall along the path, not just the end value — is shallower for the diversified mix in every regime, crisis, bear and bull alike. A steadier ride is the point.
Under the hood the diversified mix runs at about 9% annualized volatility versus 21% for the concentrated one — the same shocks, spread across assets that don’t all move together. It’s one of Slowio’s advanced tools — in the Rebalance & Opt. tab you can run it on your own holdings, pick the horizon and the optimizer objective, and read the full scenario table.
Slowio is an educational research tool, not financial advice. Figures are computed from Slowio’s data snapshot at build time and may not reflect the latest market data — nothing in this email is a recommendation to buy or sell any security. Do your own research.
Run the same analysis on any of the 9,000+ companies Slowio follows — free, no card required.