Are Monte Carlo simulations really any good?
There are a number of ways to model the future. The simplest is to just take some average returns and inflation rate and do arithmetic out into the future. If in 1992, companies had forecasted the number of floppy disks that way, we would be buried in them by now. Another approach is to use actual history and look at different historical periods and see how a portfolio would have done then. That’s a reasonable approach but as we all know, history is not a guarantee of the future. Again, read the book “Fooled by Randomness.” Monte Carlo simulators simulate thousands of possible futures. Are they perfect, certainly not. Not all simulated futures are equally likely, for example. The approach one should take is that this is one tool to use in evaluating your financial future. Do not take all numbers as gospel but get an idea of the effect of different strategies on your financial future.
