Monte Carlo Sim

đź“Š Investing
1

Hi, trying wrap my head round this.

Standard deviation curve has 68% in the middle with rarer chances either side. Is Monte Carlo sim the same?

300k after 20 years, is most likely 50%= 2.5m
<10% 700k and <10% 7.6m

Is that right? Thanks

2

That would be the general idea, yes.

The big caveat here is that stock returns definitely do not follow a normal distribution.

Also geometric mean is lower than arithmetic mean (they are equal when variance is 0, but for random processes the geometric mean is lower than its arithmetic counterpart by a factor proportional to the standard deviation) - expecting some 11% per year is a rather optimistic forecast.

3

Don’t forget there are 3 kind of lies: Lies, damn lies and statistics

And I’m saying this while working for THE most evil financial corporation in the world basically selling numbers and calculations.

I’m planning my retirement with a 6% average annual gain assumption (and I’d be happy with this 6% average) if it is 8, I’m better of. If it’s 11 like @Zergui says hurray! :slight_smile:

On some more serious note, an SD curve is not even used as an indicator, nor [plain]Monte Carlo sim. It’s true that there are scenarios where short of having a magic 8 ball, you can do nothing but use MCS. But you use multiple levels/scenarios/timelines per position with markov or hastings sampling strategies. Most often something like a forward looking brownian bridge is preferred to anything I wrote above.

and… even when you run these simulations for days on “cloud” muscle power and sell these numbers, I still think it’s air :slight_smile:

For most people especially if they are young, punching in numbers on a “compound interest calculator” (although we are using it for stock gains) with

  • I’m gonno save this much every month
  • I’ll increase the saving amount by this much every year
  • and I will save for 20-30 years
  • with 6% annual interest

will give a much better indication of years to come.

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4

Are you adjusting for inflation? Usually I assume 8% return and minus 3% inflation, giving 5% as growth rate in the calculator, showing value in today’s terms