143 | A Tough Look

Baked into a Monte Carlo simulation is the reality that there could (will!) be seasons of abysmal returns at some point in the future.

The purpose of the exercise is to see through those seasons and still assign a probability of success that funds will last beyond those tough times.

But the problem is that once you’re in that season – the season that you predicted would happen – your single metric for measuring odds of success fails you.

“We were 95% certain we can handle the bad times, but now that we’re in them, we’re only 70% sure we can handle them*.”

That’s a tough look – if you knew something would happen, how can you be less certain of the future once it actually happens?

*I’m not speaking to legitimate qualitative things that might change an outlook on the future, I’m only speaking to the way the math actually works with Monte Carlo simulations.