I have recently learned about monte carlo simulations in excel. For those that are not so sure, monte carlo is essentially a simulation that you can run a lot of times to get the probability distributions of the process that you are about to take. Immediately, I thought of simulating the distributions of returns for different portfolios and for different numbers of years.
So here are the parameters of my simulations:
1. Current Investments of 2000
2. Time to retire is either 20/30 years
3. The annual sum of investment is S$40,000
4. S&P 500's average return and standard deviation were set to 11.2% and 18% respectively
5. All-Weather's average return and standard deviation were set to 7.14% and 7% respectively
5. Golden Butterfly's average return and standard deviation were set to 9.96%, 8% respectively
6. I ran 10,000 iterations for each scenario
I will be looking at the 25th, 50th and 75th percentile of the simulations for each of the following portfolios for different time horizons (S&P 500, All-Weather, Golden Butterfly). Also, for clarity, I will put the returns in percentage of the amount that I will be putting in for each of the time horizons. I will also be elaborating on each of the portfolios in my future posts. Do keep a lookout for that. Let us dive right in!
20 years horizon (800,000 invested)
S&P 500
25th Percentile: $1,634,455.19 (208.52%)
50th Percentile: $2,282,044.73 (292.35%)
75th Percentile: $3,267,668.98 (411.24%)
All-Weather
25th Percentile: $1,437,916.75 (181.73%)
50th Percentile: $1,636,773.93 (206.42%)
75th Percentile: $1,859,624.41 (236.02)
Golden Butterfly
25th Percentile: $1,908,895.49 (241.29%)
30 years horizon (1,200,000 invested)75th Percentile: $1,859,624.41 (236.02)
Golden Butterfly
25th Percentile: $1,908,895.49 (241.29%)
50th Percentile: $2,220,314.74 (281.49%)
75th Percentile: $2,587,323.24 (329.80%)
75th Percentile: $2,587,323.24 (329.80%)
S&P 500
25th Percentile: $4,164,872.25 (361.12%)
50th Percentile: $6,521,762.47 (569.26%)
75th Percentile: $10,322,867.69 (876.24%)
All-Weather
25th Percentile: $3,180,541.45 (266.76%)
50th Percentile: $3,758,431.78 (314.80%)
75th Percentile: $4,483,307.45 (375.15%)
Golden Butterfly
25th Percentile: $5,070,241.72 (426.91%)
50th Percentile: $3,758,431.78 (314.80%)
75th Percentile: $4,483,307.45 (375.15%)
Golden Butterfly
25th Percentile: $5,070,241.72 (426.91%)
50th Percentile: $6,238,384.01 (522.47%)
75th Percentile: $7,709,867.92 (643.23%)
So, the story is simple right? We should obviously strive for the S&P500 for the 20 and 30 years time horizon and get the maximum benefit?
Hold on my friends. Let me tell you more about my analysis.
Yes. S&P 500 has the largest return. But, we need to have a more comprehensive picture. When I have tried to calculate the probability of the portfolio losing the money, we might want to reconsider our options. (Essentially, I try to get the percentage of the 10,000 iterations that the portfolio LOSES MONEY.
20 years horizon (800,000 invested)
S&P 500 - 1.4%
All-Weather - 0.0075%
Golden Butterfly - NA (Excel thought that the number was too small)
30 years horizon (1,200,000 invested)
S&P 500 - 0.45%
All-Weather - NA (Excel thought that the number was too small)
75th Percentile: $7,709,867.92 (643.23%)
So, the story is simple right? We should obviously strive for the S&P500 for the 20 and 30 years time horizon and get the maximum benefit?
Hold on my friends. Let me tell you more about my analysis.
Yes. S&P 500 has the largest return. But, we need to have a more comprehensive picture. When I have tried to calculate the probability of the portfolio losing the money, we might want to reconsider our options. (Essentially, I try to get the percentage of the 10,000 iterations that the portfolio LOSES MONEY.
20 years horizon (800,000 invested)
S&P 500 - 1.4%
All-Weather - 0.0075%
Golden Butterfly - NA (Excel thought that the number was too small)
S&P 500 - 0.45%
All-Weather - NA (Excel thought that the number was too small)
Golden Butterfly - NA (Excel thought that the number was too small)
Essentially, through the data above, we can assume that for a 20 and 30 years horizon, we will not lose money from the All-Weather and Golden Butterfly portfolio. The probability of S&P 500 losing money would also decrease as we extend our time horizon (Duh). But for those of us that are extremely paranoid about losing money, maybe the other 2 portfolios may be more suitable for you.
With that, I hope that you can benefit from this. I hope to hear comments from you (Whether you guys like these kinds of content).
Till then,
Stay vested, stay frugal my friends.
Dionysius
Oh. For those interested to run the numbers, do let me know and I will send you the files. Or you can find the version I adapted from this link below; https://alphabench.com/data/monte-carlo-simulation-tutorial.html
Essentially, through the data above, we can assume that for a 20 and 30 years horizon, we will not lose money from the All-Weather and Golden Butterfly portfolio. The probability of S&P 500 losing money would also decrease as we extend our time horizon (Duh). But for those of us that are extremely paranoid about losing money, maybe the other 2 portfolios may be more suitable for you.
With that, I hope that you can benefit from this. I hope to hear comments from you (Whether you guys like these kinds of content).
Till then,
Stay vested, stay frugal my friends.
Dionysius
Oh. For those interested to run the numbers, do let me know and I will send you the files. Or you can find the version I adapted from this link below; https://alphabench.com/data/monte-carlo-simulation-tutorial.html
0 comments:
Post a Comment