Monte Carlo Investment Simulation

Many months ago, I saw this blog post about a Monte Carlo investment simulator. I liked it right off the bat because rather than giving exact answers, it gives probabilities of outcomes instead. You can read more about Monte Carlo method at Wikipedia.

A few comments about their simulator:

  • At first I was annoyed that I couldn’t specify my estimated nominal return on my investments. But then I thought, well, they have probably determined the average return of a conservative portfolio over the past few decades and so its probably better that I don’t have the power to change it, otherwise, I might be prone to use an overly-optimisted return
  • They use 4.83% as an expected inflation rate, which “corresponds to the average inflation rate for the period of 1974 to 2004″ according to their instructions on their website. Isn’t that a bit high? The most I have ever heard quoted is 3-4%, but almost 5%?
  • I noticed that there is no way to specify a monthly cash flow into an asset. It turns out that any leftover surplus in the cash-flows tab will get transferred into assets (in the same proportion I assume).

I have been playing around with it for a while today and I plan on fine-tuning it a bit more. There are also a few other simulators that the blog post above mentions. Not sure how many of those are free though.

Popularity: 5% [?]

2 Responses to “Monte Carlo Investment Simulation”


  • I posted this over at allfinancialmatter blog, but I thought you might be interestest as well…

    There’s another free online MCS calculator at http://www.flexibleRetirementPlanner.com

    This one is a little different in that it makes it easy to experiment with different scenarios to “stress test” your plan.

    For example, you can plug in a market crash of 25% in year 5 of your retirement and see how it affects the outcome. Or, you could plug in ten years worth of LTC expenses starting at age 75 and see how your plan does under that scenario.

    Also, it has support for some of the new research about dynamically changing withdrawal amounts based on market conditions.

    Jim

  • 5% inflation is about right for that time period. Its about 4% post WW2, about 3% with the 1930’s deflation in the sample.

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