Monte-carlo

monte-carlo
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Unformatted text preview: Before Walt Huckabee, a retired engineer, buys mu- tual fund shares, he likes to take a test drive using a computer-based statistical technique known as Monte Carlo simulation. He contends that crunching numbers online, using a service available through his account at Vanguard, gives him a better sense of the range of possible fin- ancial returns for his investments, in good and bad markets. ''It's the difference between theory and prac- tice,'' said Mr. Huckabee, 60, of Placerville, Calif. The bear market has made people like him look for more precise meth- ods of assessing whether their port- folios will provide enough retirement income. Compan- ies seeking inde- pendent advice to help employees in- vest for retirement have made Monte Carlo simula- tion widely available. The developers of Monte Carlo simulation warn that the technique is imperfect at best, but they say it helps display the range of possible returns more ac- curately than do other methods. Traditional financial projections generally assume a fixed annual compounded return, and fixed interest and inflation rates. Monte Carlo simulations, which use random numbers to imitate behavior, run invest- ments through thousands of situations to assess the probability of reaching a financial goal. Calculations assume variations in inflation, interest rates and mar- ket returns based in part on history's wide range of returns, going back to the 1920's. The largest companies that generate Monte Carlo simulations for in- vestors include Financial Engines of Palo Alto, Cal- if., Morningstar of Chicago and Fidel- ity Investments, the biggest mutual fund company. Financial Engines supplies online simulations to 20 financial institu- tions, including Vanguard, which generally make the techniques avail- able free to their investors. Financial Engines also provides number- crunching services to 800 companies, including Mc- Donald's and Occidental Petroleum, for their employ- ees. Together, these investors number more than ees....
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