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Mary Beth Franklin: How To Battle Sequence-Of-Returns Risk
FYI: There were two recurring themes at the annual InvestmentNews Retirement Income Summit in Chicago earlier this month: the economic impact of increased longevity and the need for guaranteed income in retirement.
The uncertainties in sequence of returns is a persistent issue to portfolio survival. The level of accceptable risk for an individual coupled to portfolio survival also is an issue. Some folks would be satisfied with a 95% success likelihood while others would not be comfortable with those odds. We’re all different especially when risk and uncertainties enter the equation.
One tool available to all of us that allows us to explore the vicissitudes of these risks is Monte Carlo computer simulations. That tool allows us to explore countless what-if scenarios in just a few minutes. Thousands of scenarios are examined within the simulation for the given input and a likelihood (probability) of success and/or failure is the simulation output. That should help in the decision processs. And it’s fun.
I have run many simulations myself and these have indeed been useful before taking any action. I have posted this recommendation many times in reply to earlier questions, but it is still worth repeating. Please go to the Portfolio Visualizer and use it’s Monte Carlo tool. Don’t be intimidated by the math. Here is the Link:
Try many what-if cases. Each will help identify how robust to shortfalls your portfolio really is. It just might shock you. This insight will permit you to make adjustments in your portfolio’s construction and should help you to gain confidence in its survivability odds. Changes can be made to improve those odds as required. Good luck. Monte Carlo codes are great tools when exploring the unknown and unknowable future.
Comments
The uncertainties in sequence of returns is a persistent issue to portfolio survival. The level of accceptable risk for an individual coupled to portfolio survival also is an issue. Some folks would be satisfied with a 95% success likelihood while others would not be comfortable with those odds. We’re all different especially when risk and uncertainties enter the equation.
One tool available to all of us that allows us to explore the vicissitudes of these risks is Monte Carlo computer simulations. That tool allows us to explore countless what-if scenarios in just a few minutes. Thousands of scenarios are examined within the simulation for the given input and a likelihood (probability) of success and/or failure is the simulation output. That should help in the decision processs. And it’s fun.
I have run many simulations myself and these have indeed been useful before taking any action. I have posted this recommendation many times in reply to earlier questions, but it is still worth repeating. Please go to the Portfolio Visualizer and use it’s Monte Carlo tool. Don’t be intimidated by the math. Here is the Link:
https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
Try many what-if cases. Each will help identify how robust to shortfalls your portfolio really is. It just might shock you. This insight will permit you to make adjustments in your portfolio’s construction and should help you to gain confidence in its survivability odds. Changes can be made to improve those odds as required. Good luck. Monte Carlo codes are great tools when exploring the unknown and unknowable future.
Best Regards