Blog - Monte Carlo: Are Statistics Set in Stone?

Andrew Gipner
Lead Financial Planner

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Last month, I had the opportunity to attend the annual conference for the National Association of Personal Financial Advisors (NAPFA) – an organization in which Longview prides itself for being a member.  While the Longview team has long attended the conference on an annual basis, this was my first time. I must say, the sharing of ideas and knowledge amongst financial advisors from numerous backgrounds and locations is an experience that truly motivates our team to serve you at a higher level.

Over the 4 days in Chicago, numerous topics were discussed ranging from a current economic overview to an inspirational keynote address by former astronaut, Captain Jerry Linenger. With each conference presentation providing valuable planning information and insights, choosing one particular area to discuss this month proved to be harder than anticipated.

Like a bride who tries on a hundred dresses only to choose the first, I have decided to discuss not only the topic of my beginning break-out conference session, but also one that is weighing heavily on the minds of the Longview team – The Monte Carlo analysis.

In guiding individuals to the attainment of their goals, we often use a Monte Carlo simulation to help assess the likelihood of a successful result. For those unfamiliar, a Monte Carlo analysis runs thousands of personal financial projections with varying investment conditions to determine the probability of success in reaching one’s goals.  For example, an individual may come to us seeking to retire immediately.  After delving into the Monte Carlo analysis, we may find that the individual has a 60% chance of reaching their retirement goals and still having any money left at age 77.  Probabilities like this can be helpful in understanding real life outcomes, which are extremely variable and constantly changing. Straight-line analyses are far too static and deterministic to rely on alone.

However, the ultimate question is whether or not the Monte Carlo analysis is a precision tool that depicts the ultimate outcomes. As discussed by Apollo Lupescu, Vice President of Dimensional Funds Advisors, and in the opinion of the Longview team, the answer is a firm no.

What comes to mind is an example used at the conference by Lupescu himself. When an airline pilot takes off into the sky (something that amazes me every time), his or her course of direction is sometimes the unintended track. There could be rain storms, heavy air traffic, or even an easier way. However, what the pilot ultimately does is gets you to your destination. Well put, Mr. Lupescu!

While we are by no means airline pilots, we view it as our responsibility to help all individuals and families that we work with achieve their goals. Sometimes it takes a different course of action and other times it is simply “sticking to the plan.”

So, what is the purpose of the Monte Carlo analysis if it is not used as a precision tool? Simply put, in getting our clients to where they want to be and in dealing with the inevitable changes that come in life, the analysis becomes an important guidepost or signal.  As such, it orients us towards the path(s) that lead to success and indicates what changes, if any, are needed to arrive there.

All in all, while we are not in pursuit of the “perfect” or “precise” financial plan, we want to make sure that those we serve are well on the pathway to success.  With tools such as the Monte Carlo analysis, information and guidance is obtained that will pave the way to reaching your goals and desires!


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