FRP mechanics and returns
Posted: Sat Dec 06, 2014 3:29 pm
Dear Jim and FRP users,
I'm very new to all this but find this program to be an amazing, one-of-a-kind tool to run detailed financial simulations without digging into
the Monte Carlo methodology.
I did a very simple setup and don't really understand the results. I set a 65 yr old user to retire at 65 with a $1,000 taxable portfolio, chose the moderate risk portfolio, (8.0 % with 9.9% SD). I made spending stable at 1 dollar per year and retirement income at 1 dollar per year, and ended the plan at 95 (30 year run). Inflation was 0.
So I copied the 10%, median and 90% portfolio values into excel for each year and then back-calculated the annual return for each year (from the year before) for 10, 50 and 90 percentile. I figured this would give me 30 samples of the 10, 50 and 90% annual returns.
My problem is I don't understand why the average of the median portfolio growth is 6.5 percent when FRP says it was sampling 8% with 9.9% SD.
I'm sure I have done something stupid, or I don't understand how the program works (I understand it is monte carlo...i.e. not every return is a constant, but why isn't the mean return of median portfolio not centered around 8% ?).
Here's more of the data:
median Portfolio annual returns (31 years): 6.0% - 6.9 % mean of 6.5%
10 percentile portfolio ann. returns (31 yr): -4.3% to 6.1 % mean of 4.5 %
90 percentil portfolio ann. returns : 7.1% to 17.3 % mean of 8.4 %
I'm running the downloaded version of the program if that matters.
I look forward to learning from you guys, and hope this isn't too big a waste of your time.
Thanks for any insights !
Lindsay Hough
I'm very new to all this but find this program to be an amazing, one-of-a-kind tool to run detailed financial simulations without digging into
the Monte Carlo methodology.
I did a very simple setup and don't really understand the results. I set a 65 yr old user to retire at 65 with a $1,000 taxable portfolio, chose the moderate risk portfolio, (8.0 % with 9.9% SD). I made spending stable at 1 dollar per year and retirement income at 1 dollar per year, and ended the plan at 95 (30 year run). Inflation was 0.
So I copied the 10%, median and 90% portfolio values into excel for each year and then back-calculated the annual return for each year (from the year before) for 10, 50 and 90 percentile. I figured this would give me 30 samples of the 10, 50 and 90% annual returns.
My problem is I don't understand why the average of the median portfolio growth is 6.5 percent when FRP says it was sampling 8% with 9.9% SD.
I'm sure I have done something stupid, or I don't understand how the program works (I understand it is monte carlo...i.e. not every return is a constant, but why isn't the mean return of median portfolio not centered around 8% ?).
Here's more of the data:
median Portfolio annual returns (31 years): 6.0% - 6.9 % mean of 6.5%
10 percentile portfolio ann. returns (31 yr): -4.3% to 6.1 % mean of 4.5 %
90 percentil portfolio ann. returns : 7.1% to 17.3 % mean of 8.4 %
I'm running the downloaded version of the program if that matters.
I look forward to learning from you guys, and hope this isn't too big a waste of your time.
Thanks for any insights !
Lindsay Hough