Hi Guys,
So we have a respected and long standing member of MFO proclaiming in large, bold, red letters that I far too often refer to Monte Carlo simulations. That’s just too, too bad. If anything, that proclamation is a signal for a more aggressive campaign to extol the virtues of Monte Carlo as applied to retirement planning and other functions.
Although a few MFO Monte Carlo detractors claim that spreadsheet analyses are adequate substitutes that is simply not so, especially when planning a retirement, Monte Carlo is precisely the right tool for that arduous and uncertain job. It is the hammer that drives the retirement nail firmly into place. Here’s why.
Market returns and their sequencing are totally random events. The most brilliant minds dedicated to projecting just next year’s return, much less subsequent ones, fail most of time. Monte Carlo does the guessing in a user prescribed controlled manner for thousands of cases. It represents an averaging process for portfolio volatility. Using today’s tools, Monte Carlo accomplishes this Herculean feat in a few seconds. Even a supremely dedicated spreadsheet advocate would abandon this task after a couple of simulation attempts.
In the olden, golden FundAlarm days, I argued this odious task with a dissenter. I asked the Monte Carlo distracter how he selected each yearly input for the various class return estimates. He dithered and didn’t answer; I doubt he ever incorporated volatility in his analyses. That silenced his support for spreadsheets, but did not win him over as a Monte Carlo convert. Too bad.
Today, many Monte Carlo codes are available for free on the Internet. On MFO, I have consistently recommended and referenced the Portfolio Visualizer version. It has many nice pros and a few cons. I decided to supplement that reference with two others. Each has its strong features and some shortcomings. As a user, you get to choose your favorite one for your special needs. It likely will change for specific issues.
I now supplement the Portfolio Visualizer Monte Carlo code endorsement with versions from MoneyChimp and Flexible Retirement Planner. Here are the Links to all three powerful Monte Carlo options:
https://www.portfoliovisualizer.com/monte-carlo-simulationhttp://www.moneychimp.com/articles/volatility/montecarlo.htmhttp://www.flexibleretirementplanner.com/wp/You will need to launch the Monte Carlo simulator from Flexible Retirement Planner with several additional steps before using it. Not so for the two other simulators.
I have used all three codes, and all yield respectable results. Since these simulation tools address the unknowable future, all the results are presented in a probabilistic format. They generate the odds of portfolio success and estimates of portfolio final size ranges.
If you are planning retirement, or concerned about the health of your current portfolio, please give these tools a test run or two. What-if scenarios and tradeoffs are easily explored.
These tools will help you in making investment decisions. With increased information, they certainly will do no harm to your decision process. Have fun!
Best Regards.
