ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
This topic has come up before, and I'm always surprised at the aversion some people here have to MC analysis and the overconfidence they have in FC (which relies on perhaps 5 independent samples if you are looking at 30 year outcomes). Some of this seems to be based on a misunderstanding on how MC works if historical data is used to model the distribution. For example, there aren't "a s***load of parameters" used, there are two (mean and variance) for normal or log-normal distributions and maybe one or two others if a "fat-tailed" distribution is used. There are no parameters used at all if bootstrap sampling is used.
But, more importantly, what are the alternatives? As a famous statistician once said: "all models are wrong, but some are useful."
Who says anyone has 'overconfidence in FC'? This was recently covered in the 'pet peeve' thread - please don't put words in other posters's posts.
From my perspective, FC reports history. I am reasonably confident that it does this reasonably accurately (there are some questions about the bond re-balancing algorithm). What you decide to do based on that report is a personal choice. But I don't think it infers an 'overconfidence' in it. It shows ~ 100 different lines - which one am I supposedly 'confident' in? And I understand the future could be worse than the worst of the past. But I think it's a reasonable data-point.
You say that MC uses only two parameters? But on how many variables? FC is looking at market returns, fixed returns, and inflation. I don't believe those are totally independent, so how does MC handle any correlations (positive or negative)? Without a full understanding of that, I don't know what to think about any MC run.
FWIW, I approach the historical calculators conservatively. I plan for the outside chance one of us lives to 100 (beyond that is diminishing changes anyhow). I choose 100% success rates. Then I throw in a little buffer. How does that make me 'overconfident'?
edit/add: I agree with you that there are really only a few economic cycles represented in this history. But what else can we do? You need to start somewhere.
-ERD50