Wednesday, July 18, 2012

Guessing the future

Continuing on the theme of how hard it is to estimate accurately what will happen tomorrow, let alone in a decade or two, I ran some figures through a Monte Carlo calculator. An MC calculator will give a range of possible outcomes and not just pump out one result.

When I read something to the effect that if I invest so much and get such and such a return each year for so many years I'll end up with this, I cringe. The one thing I am certain of is that my investments will never return exactly the same amount two years in a row, let alone two decades.

Simply plugging an annual percent return into a calculation tells you next to nothing.

So, I plugged some numbers into an MC calculator and here are just two of the many results.

As you can see, based on past results, the above numbers could power a lucky portfolio well into the financial stratosphere

But take the same numbers and run another monte carlo scenario and you discover that an unlucky investor can have his/her RSP portfolio completely devoured in little more than a dozen years.

So, what will happen in the future? I don't know. But, if 80 percent or more of the results from my MC calcualtions are in the black, I'm happy.

And remember, if one actually saw their money disappearing at the rate it does in my second chart, corrective measures should be taken quickly and the total collapse would most likely be prevented.

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