I am hearing about people delaying retirement due to the bear market. “My probability of success has fallen!” They’ll say. Now while that’s actually true, I think what they’re missing is how Monte Carlo scenarios that the vast majority of financial planners and websites use are actually conducted, and this is a big flaw in how Monte Carlo scenarios work.
I’m not going to go into a tutorial of Monte Carlo here. However, I did post a video earlier on both my Youtube channels about this which you can find on my second channel here. (For some reason the video was only playing sometimes on my main channel. Not sure what that’s about. But you should subscribe to my second channel anyway.)
Now, here are a couple articles for those of you who want a deep dive into Monte Carlo analysis. One. Two. Three (In the third link, do Control F and type Monte Carlo to find the article.)
Monte Carlo starts with your CURRENT BALANCE as if we live in a vacuum, i.e., it doesn’t recognize the market is already down 20+ percent. As such, it assumes just as equal of a chance your investments drop another 20+ percent the next year. In the video I did, I show you how that’s not a probability that makes any sense at all. Can we drop 20+ percent in two consecutive years? Sure… likelihood of that happening? VERY, VERY LOW.
In fact, if you look at the Wellington Fund it only did that ONE TIME in it’s nearly 100 year history. If you factor in inflation during that time it didn’t even it drop 20+ percent in two consecutive years ever because it was DEFLATION in that same time period. Again, watch that video!
So, using a Monte Carlo analysis with today’s markets already down 20% completely turns the odds against you for a real world scenario. I invite you to look at ANY year for bonds after a down year. Just look at the returns. Do you see ANY likelihood of a down year happening in consecutive years for bond funds? Of course not. Does Monte Carlo recognize this? Nope.
This doesn’t mean it’s a bad program, of course, because ANYTHING could happen. But it’s a program modeled on PROBABILITIES. So right from the outset we have a flaw of a probability model that doesn’t use the natural probabilities of a market declining significantly in consecutive years. The probability doesn’t support this with any likelihood.
Again, anything could happen. Don’t get me wrong. But PROBABILITIES, my friends, what’s the probability of bonds losing significant value in two consecutive years??? Stocks even??? A heck of a lot lower than you dying earlier than you reaching 90 years old, that’s for doggone sure.
Now, don’t just hang up the boots because of this email. For Heaven’s sake, do your own research and as always get on your knees and ask for God’s guidance. But please understand how Monte Carlo scenarios work before you slave away another few years due to ignorance.
Blessings,
Josh
P.S. my new book Return to Peaks Island is now available in paperback. You can get it here.
P.P.S. please, please, please read this article too. It’s the best article you’ll read all day!