Historical Analysis and Monte Carlo Sim for Retirement Plan
I am trying to run Historical Analysis and Monte Carlo sim projections for retirement savings goals. I know that there are a some good tools out there such as OnTrajectory.com and other websites. Is anyone out there performing Historical and Monte Carlo analysis on their finances? Can you offer your experiences, questions, and suggestions? Thanks and Happy New Year.
Tue Dec 29, 2015 7:51 pm
oldguy Senior Member
Cash: $ 715.00
Joined: 21 May 2006
We ran jillions of Monte Carlo SIms on the Apollo program systems before we did manned-flight, after the monkey-missions the MC inputs were upgraded and the Sims upgraded. (Of course, with a roomful of sliderule jockeys the outcome was way more granular that today's outputs.)
Stock analysts often run back-tests of a new trading technique to validate it, sell it. (Unfortunately, the market doesn't follow/repeat historical patterns, tomorrow's prices will be determined by what happens tonite, not by history.
But I'm not sure that MC Sim answers would be useful. Eg, when you use only a normal std deviation on a single parameter, the SP500 Index (about 15% for a year) that tells you that the longterm average of 11%/yr will be 11% +/-30% for 19 years out of 20, and that one data point will be an outlier. Ie, the conclusion is that the projection for next year's SP500 is mostly useless. Stocks had such a wide variance that it is almost a 50/t50 guess to project a single stock - and when you bundle 10 or 20 into a Monte C Sim the extremes will obviously go rail-to-rail. And the longterm convergence (statistical averaging) will be the 'nominal'. But you already know that the outcome will be high, low, or middle?? And can you have confidence in the calculated levels of probable outcomes?
About 50 years ago I conjured methods to trade stocks, derivatives, puts, calls, options, sold covered calls, corn futures, penny stocks, etc. After I QUIT trying to time/project, I became wealthy by using a very broad diversification and accumulating incrementally, no in/out trading, no selling, no timing.
Re the 'trajectory' site - I avoided the downhill depletion in my out-year planning, I set up my investment goals so that the portfolio value grows in perpetuity. Ie, in our retirement years the return is higher than our annual 'draw'. Two reasons - we want to leave money to the kids/grandkids. And I (selfishly?) want to remain wealthy for life, I think it would bother me to watch myself become non-wealthy as I dissipated our funds in my 90s.