utility of monte carlo simulations

[BBQ-Nut]

Quote:

Originally Posted by dallas27 MC sims can give ridiculous results. Start with a million, compound for 20 years then spend 35k annually, and you are broke in 2 years. Makes no sense but total randomness can create that scenario where the sp500 can be bought as a penny stock then recover. With MC I exclude the top and bottom 10% of results and consider them fantasy. With one, attacking aliens are driving the market down, with the other, I am breathing gold plated oxygen to show off my wealth. Sent from my iPhone using Early Retirement Forum

Brilliant!

Good thing I wasn't sipping something while reading that post!

[Totoro]

A 10% chance in becoming Midas The Second .. nice odds!

[gcgang]

I feel more comfortable knowing my plan has survived 1500-1800 out of 2000 simulations using data derived from history, than 100% success using one set of actual historical data.

My goal in using MC is to figure out how much I can spend without significant risk of running out of money (>75% success), and without either taking on too much risk or leaving a significantly larger legacy than I intend (<90%).

With the gains the market has delivered in the last few years, my % success has gone above 90%. Now, I have pleasant options to keep my 75-90% range: 1) increase spending; 2) maintain spending, but adopt a more conservative AA. What I am doing is a little bit of both, increasing cash holdings while upping charitable contributions and some discretionary spending.

I almost feel like this is cheating, ending up doing the forbidden market timing by reducing risk now, and being in position to take on more risk when the inevitable correction does occur.

[DFA]

I got my retirement plan review (Free) regular, proposed, and MC back from Schwab today; I don't know why I keep doing this, it must be insanity and like Albert said:
Insanity: doing the same thing over and over again and expecting different results.

The regular plans (current and proposed) calculator said we are fine (spend level got pretty high 2X planned at some points), but MC showed that we could be broke in 15 years or very rich at 93.

I guess I will stick with FireCalc, my plan, their current and proposed plan results and use the MC as a guideline to look at if things get really bad.

[Travelwanted]

While I like that saying, it wasn't Albert Einstein:

The above quote has been mis-attributed to Albert Einstein, Benjamin Franklin, and Mark Twain. In fact, none of these great minds were responsible for such a convincing, yet blatantly incorrect definition. The first time it actually appeared in print was in a 1981 Narcotics Anonymous text.

I also like the one: the most powerful force in the universe is compound interest. Also attributed to AE. It is uncertain if this is true.

[Big_Hitter]

Quote:

Originally Posted by clifp I think Monte Carlo simulations I have seen for retirement simulations are of virtually no value.

They are if you set up the mean-reversion piece correctly.

[REWahoo]

Quote:

Originally Posted by clifp I think Monte Carlo simulations I have seen for retirement simulations are of virtually no value.

Quote:

Originally Posted by Big_Hitter They are if you set up the mean-reversion piece correctly.

The problem is, no one will know if either of you are correct until it is too late.

[Big_Hitter]

True they need to be relatively long term but you will know when your portfolio runs dry.

BTW, thought I'd died and gone to Houston yesterday on the golf course.

[REWahoo]

Quote:

Originally Posted by Big_Hitter True they need to be relatively long term but you will know when your portfolio runs dry.

Yep, like I said - too late.

Quote:

Originally Posted by Big_Hitter BTW, thought I'd died and gone to Houston yesterday on the golf course.

I'm guessing you're referring to temp/humidity, not eau de ship channel...