Monte Carlo ?
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MasterBlaster
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Did you skip the link ?
There are a lot of Monte Carlo simulations. We have no idea which one you're referring to.
MasterBlaster
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OK I'll give it a try:
Years ago there were a lot of constant-gain retirement calculators floating around. Those calculators assumed that the portfolio grew a certain constant amount every year. But these calculators have real issues as they don't model the boom-bust business cycle and its' effects on your portfolio. To say it another way, your portolio might average 7 percent growth over long periods of time. But if you try to take 7 percent out every year you just may go broke way before your demise. This is because you deplete your nest-egg in a severe recession before it has a chance to recover.
Check out Bernstein's "Calculator from Hell" article
http://www.efficientfrontier.com/ef/998/hell.htm
The so-called Monte-Carlo retirement calculators are much much better because they look at (business-cycle) sequence of returns type issues on your portfolio.
These type calculators are much better to use and much closer model the real world.
Years ago there were a lot of constant-gain retirement calculators floating around. Those calculators assumed that the portfolio grew a certain constant amount every year. But these calculators have real issues as they don't model the boom-bust business cycle and its' effects on your portfolio. To say it another way, your portolio might average 7 percent growth over long periods of time. But if you try to take 7 percent out every year you just may go broke way before your demise. This is because you deplete your nest-egg in a severe recession before it has a chance to recover.
Check out Bernstein's "Calculator from Hell" article
http://www.efficientfrontier.com/ef/998/hell.htm
The so-called Monte-Carlo retirement calculators are much much better because they look at (business-cycle) sequence of returns type issues on your portfolio.
These type calculators are much better to use and much closer model the real world.
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Firecalc can also work fine for that purpose.
Thing with Monte Carlo is that you need to assume an underlying distribution, tricky to do. Stock market returns most certainly do not have a gaussian distribution for example, and returns from one year are correlated with another year.
It can still be useful, just be aware of what you are doing is just another approximation of an impossible to predict reality.
Thing with Monte Carlo is that you need to assume an underlying distribution, tricky to do. Stock market returns most certainly do not have a gaussian distribution for example, and returns from one year are correlated with another year.
It can still be useful, just be aware of what you are doing is just another approximation of an impossible to predict reality.
Sojourner
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If you want to play around with a good, free, easy-to-use Monte Carlo simulator, check out this one: https://www.portfoliovisualizer.com/monte-carlo-simulation
MasterBlaster
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The Monte Carlo retirement calculators that I have seen do not assume a Gaussian distribution. The ones I have seen use historical market data for the distribution of returns.
The big issue with using historical returns is...
Is the past a "good" measure of the future ? Is past also prologue ?
Anyway, these calculators are just models - Your mileage may vary !
Yes, using historical returns to construct a distribution is used as well, Vanguard does that here https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf)
It just shifts the issues around somewhat unfortunately: 1) Like you point out, who is to say that distribution is an actual reflection of the underlying future distribution? It may be a better guess than gaussian or any other distribution, but you have no way of knowing that and 2) Well, as Vanguard says it themselves:
I personally get more mileage from a combination of Firecalc and top level economic expectations.
In the long run growth comes only from economic growth and dividend yield. At the world level that's been surprisingly robust at 3% to 4% in the past 100 years or so.
In short, I'm counting on more short term volatility and sustained long term results. The last part because I'm a optimist, the first part because of technology.
It just shifts the issues around somewhat unfortunately: 1) Like you point out, who is to say that distribution is an actual reflection of the underlying future distribution? It may be a better guess than gaussian or any other distribution, but you have no way of knowing that and 2) Well, as Vanguard says it themselves:
So you can have a simulation with five -30% returns in a row for example, something which hasn't happened in reality and is equal to an armageddon scenario. Likewise you can get some spectacular outcomes if crazy bull years are repeatedly selected.
I personally get more mileage from a combination of Firecalc and top level economic expectations.
In the long run growth comes only from economic growth and dividend yield. At the world level that's been surprisingly robust at 3% to 4% in the past 100 years or so.
In short, I'm counting on more short term volatility and sustained long term results. The last part because I'm a optimist, the first part because of technology.
