You’re smokin hot and financially savvy. Monte Carlo can’t be proven or disproven. What I find cute is all the models have us living until 95. One would think Monte Carlo could factor that in its algorithm.
I think monte carlo's use an annual average and annual standard deviation. But due to the stock market's reversion to the mean principle, the annual std dev will predict vast larger variations than the actual market will produce in extended analysis. Try it. Take and average growth rate and std deviation of a fund and predict the variation of a 20 year run and compare it to a running average growth and std deviation of the 20 year period. The average growth rate will be close, but the predicted std dev will be significantly larger that the actual 20 year std dev.
I dont think you can do returns as they have a moving base, you have to do price. Something has to be frozen (like cpi) a basket of equities or index of stocks (fixed base). The Monte Carlo randomly(requires independence) throws returns at them but those returns have to be correctly distributed and thus the problem. So in 2029 the test might throw a -40% at the price however the z-score of that -40% has to be correct and what is that number? ( 0.000005% or 0.0001, who knows?) and there is another problem the year 2030 isn't independent of 2029 the chance of a large positive in 2030 is very high because 2030 is just correcting the over correction from 2029
@@whatsup3270 That is both the problem and the benefit of monte carlo. After all, the future will never really look like the past. We hope that the past has some representation of the future, else we have no hope of developing a planning scenario.
Per Ben Felix( PWL Capital)we really need to look at a 2.7 % withdrawal instead of the 4% in the bill Bergen approach. Does using Monte Carlo mediate or account for percent that can be safely drawn from a portfolio?
basically yes, it when setup correctly (there is your problem) produces a probability of success over thousands of foreseeable futures. So if you ask will the IRA last if the IRA is in the S&P 500 index and the start amount is $300,000 and the withdraw amount is $23,000/yr(7.7%) and the period is 25years? Well that will probably is low and Monte Carlo gives you that number ( which is going to need a bull run early ) However you can lower the $23k and look at the new success rate. The difference is the Monte Carlo counts the paths of failure verses the paths of success.
