walkinwood
Thinks s/he gets paid by the post
Another interesting post by Kitces:
https://www.kitces.com/blog/monte-c...-withdrawal-rates-rolling-historical-returns/
His assertion is that since Monte carlo simulations treat each period independently, they fail to take into account the historical reversion to mean in market performance. Hence, they tend to overstate the effect of fat tails over long periods (like those used for retirement planning) when compared to historical results. The overstatement is more pronounced when you assume lower than historical market returns. He admits that there are only 114 historical annual (overlapping) periods, but MC does 1000s of simulations.
Of course, it is helpful to keep in mind that there is no "natural" principle that dictates that markets behave in a certain way. After all, there are some markets that dived to zero and no longer exist.
https://www.kitces.com/blog/monte-c...-withdrawal-rates-rolling-historical-returns/
His assertion is that since Monte carlo simulations treat each period independently, they fail to take into account the historical reversion to mean in market performance. Hence, they tend to overstate the effect of fat tails over long periods (like those used for retirement planning) when compared to historical results. The overstatement is more pronounced when you assume lower than historical market returns. He admits that there are only 114 historical annual (overlapping) periods, but MC does 1000s of simulations.
Of course, it is helpful to keep in mind that there is no "natural" principle that dictates that markets behave in a certain way. After all, there are some markets that dived to zero and no longer exist.