Monte Carlo Analysis
Betting with Monopoly Money
You do the client a disservice if you show them a line chart of steady growth, or even some so-called “Monte Carlo Analysis” exercise with 1000 predictions—called the probability of success–because those approaches do not fully address the emotions of seeing $1 million going down to $750,000 on the little investment firm app on their phone. To those people who don’t make $250k/year, it feels like they just lost a years’ salary.
For 20 years I had a very sophisticated physician client who was working and then retired. After he retired, he felt like he had no income. As such he would regularly call me on bad market days exclaiming that since his $10 million portfolio had declined 2% over some short period of time, he had lost the year’s income. This persisted, even though every time we met I showed him that the accounts produced $180,000 of pure income and dividend cashflow for him.
Traditional Financial Planning Reports are flawed
Typically, in financial planning reports the solution to all problems is having what is espoused as “a diversified portfolio of investments.” The reports proscribe the clients to sell certain things that do not fit the narrative prescription of the report and reinvest in things that better “diversify” the portfolio. Cynically, when you do this, the promoted benefit is to reduce your risk via diversification. But the real reason is to invest in asset classes promoted by the firm. Commonly these fit the global diversity theme that I strongly question.
