How is Monte Carlo different or better than just looking at a long market history?
This question is very interesting. Many studies and projections for retirement planning look over some period in history to account for risk effects in planning. This is called historical analysis or backtesting (in the case of specific strategies) and is very useful. When you test a portfolio’s performance against history, no model is necessary. History is really our best information about the future when it comes to the markets. The parameters that drive Monte Carlo models come from historical data. The only problem with historical data is when you want to look at the risk associated with the long-term performance of a strategy. One of the most important examples of problems with historical data is the projection of ‘safe’ withdrawal rates from a retirement portfolio. Historical studies tend to suggest that with a portfolio of 60% stocks and 40% bonds you can take out about 4% of the value of your retirement portfolio at retirement (i.e. if you can take out an inflation adjusted $40,
