Last Updated on December 18, 2021 at 10:47 pm
This is a guest post by Jitendra Kumar, Sr.Business Analyst- Fiserv. Mr Kumar is a certified financial planner. His additional qualifications include MBA and Certification in Investment & Portfolio Mgmt. (IIMB). He is also a certified associate of the Indian institute of bankers (CAIIB).
~~~~~
Traditional Financial Planning works on certain assumptions on returns, risk, inflation, savings growth etc. In the real world these assumptions may or may not hold True. So to depict the real world uncertainty Monte Carlo Simulations are used by Financial Planners. Clearly, Monte Carlo represents an improvement over traditional methods of financial planning.
The Monte Carlo method is used to simulate the various sources of uncertainty that affect the value of the instrument, portfolio or investment in question, and to then calculate a representative value given these possible values of the underlying inputs. (“Covering all conceivable real world contingencies in proportion to their likelihood.”)
A Monte Carlo simulation is a mathematical tool that offers a way to evaluate a retirement portfolio to see if it will last a lifetime. With the help of computer software, a planner can simulate hundreds or thousands of market-condition scenarios and learn the probability that your portfolio would last your expected lifetime.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Now a more sophisticated alternative is working its way into financial planning. Using computer software or a Web-based program, you can calculate the probability of achieving your goals through a ”Monte Carlo” simulation (table).
When it comes to financial planning, a Monte Carlo simulation takes into account returns, volatility, correlations, and other factors, all based on historical statistical estimates. That’s similar to the traditional financial-planning approach.
If your portfolio is run through 1,000 simulations, projecting 1,000 separate retirement scenarios, and it works 800 times, it means there’s an 80 percent probability that the portfolio won’t run out of money. If 80 percent seems too risky and you’d like to increase the odds to 85 percent or 90 percent, you could tweak the portfolio by adding more money to your investments or taking out less.
Given the unpredictable nature of the stock market, the Monte Carlo method can help financial planners model how a particular portfolio will perform under various market conditions, thus helping them make more informed investment decisions. This approach is especially useful in retirement planning, in which investors try to figure out which savings rates, allocations, market returns, and spending patterns will allow them to make their nest eggs last a lifetime.
Monte Carlo method has become popular with financial planners because it takes into account real-world experiences in a way that other methods that assume a given rate of return don’t. “The reason Monte Carlo simulations are being used more frequently, is because they do a better job explaining the potential outcomes versus time-value-of-money calculations, such as future value. Future value will tell you the expected value of a portfolio given its present value, years to grow, potential cash flows, and growth rate. The problem with a future value calculation is that it treats the outcome as certain, while in reality, and especially with the markets, nothing is certain. A Monte Carlo simulation provides a more ‘colorful’ perspective of the range of potential outcomes given the expected return and volatility of a portfolio.”
In India very few Financial Planning Software actually have Monte Carlo Simulations. AdvisorVision from Fiserv is among the select few, has detailed Monte Carlo Simulation for all financial goals. For more information on AdvisorVision and request for Free Trial Access, please do visit our website www.advisorvision.fiserv.co.in or alternatively you can write to us [email protected] .
You can read more about Fiserv and AdvisorVision: Financial Advice Management
Specific features of AdvisorVision include:
- Automated strategies: AdvisorVision can automatically generate strategies to meet customer goals within established parameters, without manually juggling inputs to find a successful plan
- Monte Carlo simulation: Analyzes plan success probabilities based on the detailed historical data available
- Customized risk assessment: Each organization — or individual advisor — can create their own risk assessment methodology, to help tailor advice and promote specific products
- Scenario builders: Advisors can easily create “what-if?” and alternative scenarios off the base plan, to allow for contingencies and alternative funding strategies, with a minimum of effort
- Arbitrary goal analysis: Factor in a broad range of prioritized goals beyond retirement funding and distribution, for a holistic plan can create their own risk assessment methodology, to help tailor advice and promote specific products
- Support for a complete range of financial planning functions:Debt management, portfolio construction, estate planning, tax planning, and life insurance need analysis.
This is a guest post by Jitendra Kumar, MBA, CAIIB, CFP, Certification in Investment & Portfolio Mgmt. (IIMB), Sr.Business Analyst- Fiserv.
~~~~~
Note: I requested Mr. Kumar to write about AdvisorVision as I think it is important for the investor and advisor alike to be aware of Monte Carlo simulations. There is no monetary gain involved for me. MC simulations are used in almost all walks of life including Physics. If you are interested in my version, check this out: Excel Monte Carlo Retirement Calculator
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)