Hi Guys,
A day ago I submitted an innocent comment on a post that several MFOers thought was inappropriate for the topic under current discussion. That was a fair criticism. They didn't challenge the specific merits of my contribution, just its placement. They recommended that I initiate a separate post. That is an excellent idea, so here it is.
I have long championed Monte Carlo simulation to help investment decision making. Monte Carlo methods were specifically designed to address complex and uncertain issues. Those characteristics precisely describe investment decision making. Monte Carlo simulations identify the range of potential reward/penalty outcomes and provides an estimate of a portfolio's success odds. Those are useful projections.
The mathematics embedded in Monte Carlo are really very rudimentary. The power in that tool is that it randomly explores thousands of possible outcomes in just seconds on today's super-fast computers. When using the Monte Carlo tool, no mathematical sophistication is required. The inputs are simple, but do need some relevant guesstimates. Those troubling guesstimates are easily changed to explore result sensitivity to them.
Many simulators are now available on the Internet. I repeat here my earlier references to two superior Monte Carlo codes:
http://www.flexibleretirementplanner.com/wp/https://www.portfoliovisualizer.com/monte-carlo-simulationI have used both tools extensively. They are reliable codes and have been tested for many years.
Explore the impact of inflation rates, withdrawal rates, estimated returns, the standard deviation of those estimates, and various timeframes on endpoint outcomes. These uncertainties dominate and cloud forecasting, and can all be examined in just minutes.
Making minor adjustments to a proposed plan can enhance a survival likelihood significantly. Small changes do matter, and these tools can guide you in the right direction. Avoiding a dangerous portfolio decision is priceless. Pitfalls are everywhere.
However, not all is sweetness and light. Monte Carlo simulation has shortfalls and some critics. William Bernstein has documented some reservations. Here is a Link to the first in a series where he explored Monte Carlo issues in his "The Retirement Calculator from Hell" articles. He doesn't introduce Monte Carlo benefits and shortcomings until the second part of this series.
http://www.efficientfrontier.com/ef/998/hell.htmComplete agreement on any investment decision seems to be a highly improbable event. Opinion and interpretation differences are what makes a vibrant marketplace. I have been a constant advocate for Monte Carlo investing tools and have consistently recommended them on MFO.
Please consider adding these simulators to your decision making toolkit. They'll contribute to your understanding of what is important and what is not so critical when evaluating your options. Your comfort zone will be increased with a little effort in the Monte Carlo arena.
Best Regards
Added Thought: Gypsy Rose Lee is famous for other attributes, but she also showed her wisdom with the simple observation that " you gotta have a gimmick". Monte Carlo is a wise choice for one such investment gimmick.
