Mean Portfolio Value always Positive Increase

A retirement planning tool is only as good as its assumptions and inputs. Share your thoughts or ask questions about the internals of the simulation, built in planner assumptions, or planner inputs.
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kmarker
Posts: 2
Joined: Wed Jul 17, 2019 2:53 pm

Mean Portfolio Value always Positive Increase

Post by kmarker » Wed Jul 17, 2019 3:09 pm

Hi Jim, love the tool! I have a question about what I'm seeing with the mean portfolio value in the detailed view table.

I've run a scenario that goes for 40+ years using the default values for the 'Aggressive investment style and no new investments being made. The mean portfolio value always increases each year. I would think given the high standard deviation of that investment style , that there would have to be years were the mean showed a lost. As much as I would love for my 70/30 portfolio to never lose money, i don't see how that's realistic. :lol:

What am I missing? Thanks.

jimr
Posts: 523
Joined: Thu Feb 28, 2008 6:48 pm

Re: Mean Portfolio Value always Positive Increase

Post by jimr » Wed Jul 17, 2019 4:21 pm

The detailed table shows median values, but rather the mean values but that's not really the issue.

The reason you never see the portfolio go down from year to year is that the values shown from year-to-year are not continuous from the same simulation path, but rather are aggregates across all 10,000 simulation paths.

In other words, the median value for year 1 is unlikely to come from the same simulation path as the median value from year 2, and so on.

One good way to get a sense of the down-side risk of your plan is to move the mouse across the graph from year to year and look at what happens to the bottom 10% portfolio value across the years. This is also a median value, so it represents an aggregate across all runs. One way to think about the bottom 10% portfolio value is that 90% of the paths had a value higher than that in that year of the plan.

kmarker
Posts: 2
Joined: Wed Jul 17, 2019 2:53 pm

Re: Mean Portfolio Value always Positive Increase

Post by kmarker » Sun Jul 21, 2019 2:36 pm

Thanks Jim.

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