Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Monte Carlo used over a period of time
Old 05-14-2021, 05:31 PM   #1
Recycles dryer sheets
 
Join Date: Aug 2020
Posts: 217
Monte Carlo used over a period of time

I searched this site and didn't find a similar thread.

Has anyone here used Monte Carlo tools, for example portfoliovisualizer or others, as a planning tool for a period of time, for example 10 years? Did your view of Monte Carlo become more favorable, or less favorable over time, in terms of the usefulness of MC as a planning tool?

I am not referring to "period of time" in the sense of the number of years parameter in the MC simulation. "Period of time" means calendar years that you have personally used MC in your own planning toolbox.

We all know the pitfalls of thinking the future can be predicted with a fancy calculator like MC. However I do believe in robust data sets and robust analytical methods. MC could be one of those - a robust data set and a robust method.

What do people think about MC, after having used it for 10 years? Thanks for any comments.
chassis is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-14-2021, 05:37 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 8,103
I haven't used Monte Carlo simulations for 10 years, but do use the Fidelity Retirement calculator on a regular basis, which uses a MC methodology.
I think there is value for MC calculations, but on the whole it usually produces more conservative results than historical based calculators.
A main reason for this result is that for example it can use the bear market of 2000 followed by the bear market of 2008. This concept is not truly realistic based on history and the concept of reversion to the mean.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 05-14-2021, 10:12 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 3,295
Monte Carlo is definitely more conservative than reality so if a Monte Carlo analysis looks favorable, you can probably relax.
Scuba is offline   Reply With Quote
Old 05-14-2021, 11:08 PM   #4
Recycles dryer sheets
Navigator's Avatar
 
Join Date: Feb 2014
Location: Little Rock
Posts: 213
Iíve used Monte Carlo simulators for many years and believe they are a powerful planning tool. The criticism of them is that they do not reflect the marketís tendency to return to its average valuation. That is, the worst market performance in the MC simulations will string together 30 years of poor returns and the best simulations will string together 30 years of exceptional returns. We have not seen bull or bear markets in the US like this yet, but other countries certainly have seen something close. If one ignores the best and worst predictions, the MC simulations can be fairly accurate. I always combine the results with those of historical calculators to get a more complete view of the range of possibilities for my portfolioís performance.
Navigator is offline   Reply With Quote
Old 05-14-2021, 11:10 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Dec 2018
Posts: 1,023
Monte Carlo helped me figure out I could safely FIRE. I support it.
Nick12 is offline   Reply With Quote
Old 05-15-2021, 06:29 AM   #6
Full time employment: Posting here.
Taxman59's Avatar
 
Join Date: Sep 2014
Posts: 603
I started my planning using MC. It was fun to see the extremes. With over 20k runs, the max (assuming I worked until 65, my ending balance could top out over a billion dollars! I ran the numbers for over 10 years, and the results were always comforting. When the failure rate was consistently below 3%, I knew I was good to go. With the discovery of this forum and FireCalc, that was the icing on the cake. With a sufficient number of runs, MC is a good tool.
Taxman59 is offline   Reply With Quote
Old 05-15-2021, 06:35 AM   #7
Thinks s/he gets paid by the post
Markola's Avatar
 
Join Date: Nov 2013
Location: Twin Cities
Posts: 2,207
Quote:
Originally Posted by Dtail View Post
I haven't used Monte Carlo simulations for 10 years, but do use the Fidelity Retirement calculator on a regular basis, which uses a MC methodology.
I think there is value for MC calculations, but on the whole it usually produces more conservative results than historical based calculators.
A main reason for this result is that for example it can use the bear market of 2000 followed by the bear market of 2008. This concept is not truly realistic based on history and the concept of reversion to the mean.


I didnít know that. Thanks.
Markola is offline   Reply With Quote
Old 05-15-2021, 08:08 AM   #8
Thinks s/he gets paid by the post
USGrant1962's Avatar
 
Join Date: Dec 2016
Location: DC area
Posts: 1,753
I've used various MC models along with FIRECalc for many years. They provide a different viewpoint from the straight historical calculators.

As folks have said, though, don't shoot for 100% in MC or you will never quit working. In most MC models, >95% success is very high confidence - similar to 100% in FIRECalc.
__________________
FI and Semi-ER March 24, 2017
Consulting to stay engaged

"All models are wrong, some are useful." - George Box
ďThere is always a well-known solution to every human problem: neat, plausible, and wrong.Ē - H.L. Mencken
USGrant1962 is online now   Reply With Quote
Old 05-15-2021, 10:22 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 23,153
Not a fan of Monte Carlo for this type of analysis (it is very useful in other cases).

The output of MC is totally dependent upon what the programmer uses for the ranges for each variable. Seems when it is asked how these ranges are determined, the answer is they tweak them until they seem to match historical records.

Then why not just use historical records!

Historically, there may be some connection between things like interest rates and market returns, I don't think MC takes this into account, everything is independent, and therefore, unrealistic (IMO).

-ERD50
ERD50 is online now   Reply With Quote
Old 05-15-2021, 02:57 PM   #10
Recycles dryer sheets
 
Join Date: Oct 2020
Posts: 190
The important thing is to know the strengths and weaknesses. Average returns is most useful for tax and estate planning where you hope everything averages out.

I prefer historical to MC for answering the "can I retire question?" as momentum and reversion to the mean are real but not captured in Monte Carlo. As a result, MC produces "fat tails", overstating the likelihood of best and worst cases.

Sometimes to avoid data mining (where we have snooped the data before we make our hypothesis) or to look at long periods of time where there isn't enough history to be statistically significant, MC is the best choice.
Exchme is online now   Reply With Quote
Old 05-15-2021, 05:45 PM   #11
Thinks s/he gets paid by the post
corn18's Avatar
 
Join Date: Aug 2015
Posts: 1,207
Quote:
Originally Posted by Navigator View Post
Iíve used Monte Carlo simulators for many years and believe they are a powerful planning tool. The criticism of them is that they do not reflect the marketís tendency to return to its average valuation. That is, the worst market performance in the MC simulations will string together 30 years of poor returns and the best simulations will string together 30 years of exceptional returns. We have not seen bull or bear markets in the US like this yet, but other countries certainly have seen something close. If one ignores the best and worst predictions, the MC simulations can be fairly accurate. I always combine the results with those of historical calculators to get a more complete view of the range of possibilities for my portfolioís performance.
Quote:
Originally Posted by Exchme View Post
The important thing is to know the strengths and weaknesses. Average returns is most useful for tax and estate planning where you hope everything averages out.

I prefer historical to MC for answering the "can I retire question?" as momentum and reversion to the mean are real but not captured in Monte Carlo. As a result, MC produces "fat tails", overstating the likelihood of best and worst cases.

Sometimes to avoid data mining (where we have snooped the data before we make our hypothesis) or to look at long periods of time where there isn't enough history to be statistically significant, MC is the best choice.
I agree with these posts. MC should not be the only tool in the tool box. The "tails" on a MC sim using historical average and standard deviation can get quite large. That's because the historical returns are not a normal distribution. That's ok, use all 3 tools and see what they spit out. I put average, historical and MC all in my spreadsheet so I can see them all at once and do a lot of what if/sensitivity analysis.

I do agree that historical is probably the best to decide if you can retire. 100% historical seems to equate to 95% MC depending on the variables. I use average returns to plan and track progress in retirement.
Attached Images
File Type: jpg current.jpg (211.8 KB, 61 views)
__________________
Don't do something, just stand there!
corn18 is offline   Reply With Quote
Old 05-17-2021, 11:40 AM   #12
Recycles dryer sheets
 
Join Date: Aug 2020
Posts: 217
Thanks to all, these are helpful comments. I am a believer in robust tools and methods. Part of the definition of "robust" in my view is the use of a tool or method over a period of time. The "test of time", to borrow a phrase.

If the preponderance of evidence, quantified by frequent use of Monte Carlo simulation over a period of years, indicates FIRE is possible, then FIRE is possible. And possibly sooner than the preponderance of the evidence, owing to the likely conservatism in Monte Carlo simulations.
chassis is offline   Reply With Quote
Old 05-17-2021, 02:29 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 11,480
Quote:
Originally Posted by ERD50 View Post
Not a fan of Monte Carlo for this type of analysis (it is very useful in other cases).

The output of MC is totally dependent upon what the programmer uses for the ranges for each variable. Seems when it is asked how these ranges are determined, the answer is they tweak them until they seem to match historical records.

Then why not just use historical records!

Historically, there may be some connection between things like interest rates and market returns, I don't think MC takes this into account, everything is independent, and therefore, unrealistic (IMO).

-ERD50
^ This.
youbet is offline   Reply With Quote
Old 05-17-2021, 04:22 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 15,644
Kind of irrelevant to use after you retired...


I looked at the results back when I was deciding to stay unemployed or look for a job... along with other options and decided I had enough....


Have not looked at any calculation since...
Texas Proud is online now   Reply With Quote
Old 05-18-2021, 07:41 AM   #15
Thinks s/he gets paid by the post
GravitySucks's Avatar
 
Join Date: Feb 2014
Location: Syracuse
Posts: 2,978
Reading this thread I went back and looked at earlier Fidelity Planner tool outputs.
8 years ago I had failure at age 90 for the periods where returns were worse than 75% of the expected.
3 years ago even the 90% worse case survived passed the 92 year old end run. The average run case said I would have less banked than is actually there at this point.
All irrelevant as:
Markets have been better than average.
Inflation has been lower than the model assumes.
My spending has been slightly lower than expected the last couple of years.
The model assumed a higher rate of inflation for health care in the 8 years ago run.
__________________
ďNo, not rich. I am a poor man with money, which is not the same thing"
GravitySucks is offline   Reply With Quote
Old 05-19-2021, 09:19 PM   #16
Thinks s/he gets paid by the post
Markola's Avatar
 
Join Date: Nov 2013
Location: Twin Cities
Posts: 2,207
Quote:
Originally Posted by GravitySucks View Post
8 years ago I had failure at age 90 for the periods where returns were worse than 75% of the expected.


Iím trying to understand. Are you saying 75% of the time those models 8 years ago predicted success, i.e. no failure at age 90? If so, doesnít that mean the models worked correctly since you had a 3 out of 4 chance of succeeding, and you in fact seem to be succeeding?
Markola is offline   Reply With Quote
Old 05-20-2021, 03:54 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 8,103
Quote:
Originally Posted by Markola View Post
Iím trying to understand. Are you saying 75% of the time those models 8 years ago predicted success, i.e. no failure at age 90? If so, doesnít that mean the models worked correctly since you had a 3 out of 4 chance of succeeding, and you in fact seem to be succeeding?
IIRC, one of the models that Fidelity uses is where using "average" market returns translates to meaning that the results reference what is to be expected 75% of the time. Thus a 75% confidence level.
They also have a "significantly below market performance" model which translates to a 90% confidence level.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 05-20-2021, 07:00 AM   #18
Dryer sheet wannabe
 
Join Date: Dec 2020
Posts: 11
Quote:
Originally Posted by Dtail View Post
IIRC, one of the models that Fidelity uses is where using "average" market returns translates to meaning that the results reference what is to be expected 75% of the time. Thus a 75% confidence level.
They also have a "significantly below market performance" model which translates to a 90% confidence level.
I think Fidelity planning tool uses Monte Carlo simulation, so the extreme ends are actually not that realistic because stock market tend to revert to norm. So that 90% confidence level could be worse the actual worst case scenario.
kingfisher is offline   Reply With Quote
Old 05-20-2021, 12:41 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 8,103
Quote:
Originally Posted by kingfisher View Post
I think Fidelity planning tool uses Monte Carlo simulation, so the extreme ends are actually not that realistic because stock market tend to revert to norm. So that 90% confidence level could be worse the actual worst case scenario.
This is true and I mentioned this concept in an earlier post. Some folks in general equate an approximate 5% difference in success rates between Monte Carlo sims and historical sequencing sims, with the Monte Carlo being more conservative.
There is also some leeway in programming these sims as mentioned by ERD50, so that there is effectively a push closer to an historical sequence concept.

P.S. The 75% confidence level I mentioned previously is actually with a "below market performance", not an average market performance which equates to a 50% confidence level in the Fidelity program.
Nevertheless, that is why most folks who use their program for guidance default to the Significantly Below Market scenario.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 05-20-2021, 02:45 PM   #20
Thinks s/he gets paid by the post
corn18's Avatar
 
Join Date: Aug 2015
Posts: 1,207
I like showing my wife the output from my historical model and telling her that our retirement will probably not look like any of those lines. Then she always points to the top one and says, "Oooh, I like that one!"
Attached Images
File Type: jpg fc.jpg (413.9 KB, 25 views)
__________________
Don't do something, just stand there!
corn18 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Monte Carlo question modlair FIRECalc support 2 05-26-2006 06:51 PM
Monte Carlo Excel Add-In haha FIRE and Money 4 05-23-2006 10:51 AM
monte carlo Mysto FIRE and Money 5 04-18-2006 06:34 PM
Monte Carlo now can be used by brokers newellcr FIRE and Money 3 02-18-2005 09:41 AM
Online Monte Carlo calculator RoyUtah FIRE and Money 5 01-18-2004 02:41 AM

» Quick Links

 
All times are GMT -6. The time now is 08:24 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.