The Flaw in Monte Carlo Simulations

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[theodfw]

Thanks for sharing this Josh, the chart on page 7 is very revealing. This is why the analysis you have done on so many videos, and tools like firecalc are so much more valuable than MC simulations. Keep up the good work.

[tomgradel]

Jim Otar's point about long term trends being less well suited to MC is a good one. Using both Monte Carlo (MC) and backtesting seems like the best solution since backtesting only uses historical results, and we're all warned that historical returns are no predictor of future returns. MC, rather than backtesting, seems like a reasonable tool to examine such factors as the current lowest historical bond returns in history. For example, Wade Pfau examines this in his use of MC to predict retirement outcomes by sampling a bond-type of return distribution but increasing the mean return rate over time.

[johnc]

Hear you comin' out of both speakers... 10-4! I'm going to look into the Otar Retirement Calculator. Thanks....

[rickleffel]

He also has a another paper that says the bucket approach does not help

[danfarrer]

I ordered his book. Sounds interesting. Thanks for sharing.

[chesterchambers]

Perhaps the title should have been “Common errors in construction and interpretation of MC models”. None of these issues are fundamental flaws in the MC idea.

[brucesmith]

Thanks Josh never heard of it, kinda glad I didn't.

[scottgriffith]

Great article. I’m going to dig into this further.
One negative:
That distribution around 10:00 time stamp on the right side... does not ring true to me. The area under the curve above the mean should equal the area under the curve below the mean.

[rossmacintosh]

Thanks Josh. It was a bit confusing trying to figure out if FireCalc's simulator has the issues discussed or not?? I always assumed FireCalc uses a monte carlo simulation approach.

[AK-kyou]

Don’t know, I’m all mono watching YouTube

[rickleffel]

In his articles 10 Bucket Stratigies that Do Not Work from 2013

[airone]

Climate change is complex issue and it depends where you live Josh. What or who is the cause is subject to debate. Living in some areas of the world there has been changes in weather/climate patterns and cycles that has not followed any climate models We have ice levels shift. Wherever you land on the subject should not box you in. The climate has always been in patterns of change. That is a fact the climate is continually changing but how it changes and where it is changing is the issue. I have had good meteorologist friend who changed his views based on data. I would not be a denier of change but nor would I be in the camp that see's the seas rise in the next decade and floods Manhattan. I do not pretend to be an expert but we have to be prepared. Blackrock has a white paper that has been interesting to look at. I think that we need to hedge our outlook and not adopt an orthodox view either way. There may be a timeline for change that is not as grim but I do think that something is going on. I would like to see more peer reviewed studies on this but my anecdotal views of Alaskan glaciers has definitely put me in the camp (what the heck is going on) especially when there is Siberian glaciers growing, go figure..We may miss something if we allow our bias to become an absolute. Healthy skepticism is good for science and for finance.

[NicE-jqwv]

One Thumbs Up just for being Christian. Take that Lefties!