How-To: Monte Carlo Simulations in Accumulation

Monte Carlo Simulation

The Accumulation calculator has always been particularly useful in depicting how the stock market can affect your assets, but now it’s even better. A few updates ago, Todd introduced a feature that can reverse or randomize the S&P rates, so that you can more effectively show “Monte Carlo” scenarios. 

If you haven’t tried it yet, I'll show you how. 

The benefits? Not only can you back up your knowledge with how the market has performed in the past—you can demonstrate how slippery it can be to rely on chance. Because really, that’s all the stock market is. 

How To

Step 1: Open Accumulation 

The beauty of accumulation, is that you can use it to demonstrate just about anything you’d like to see.  

For the sake of simplicity, we won’t add any of the bells and whistles, we’ll just look at one account. 

So, let’s say the BOY account balance is $100,000. Additionally, we’ll make the illustration period just long enough to fit the full S&P history—90 years. It’s important to note that you can choose your own time frame, but we’ll input all known data for this exercise. 

Step 2: The S&P Rates

Once you’re ready to try the reverse button or randomize button, you’ll need to copy and paste the rates from Market History. You can find this under “Tools” in the task bar. 

Here, you can take S&P rates with or without dividends. We’ll use dividends. 

Next, you’ll paste the rates into the “Annual Earnings Rate” column. Note: When you hit “reverse,” if your illustration period is longer than the market history you’ve copied, the rates will be zero until it reaches your “last” rate. 

Step 3: Choose Your Route

Now, you can choose between the reverse button and the randomize button. 

Reverse can be a fun way to see just how drastic the same rates in reverse order can affect an account. In this case, it actually positively affects the account. 

Similarly, randomize shows just how big of an impact uncertainty can have on your money. 

All you’ve got to do is select which one you’d like to see. 

After 30 years, here's what the account would look like after the first 30 years of the S&P with dividends:

Here's what the reverse looks like, after 30 years:

And here's what one randomization looks like after 30 years:

A Parting Note

Part of what makes the “Monte Carlo” scenarios so impactful, is that it shows just how radically the results can vary in the stock market. Say, for example, that the owner of this account was looking to retire in 30 years. 

Use the randomize feature, and look at the account value after 30 years. The lowest sum was, within 30 randomizations, just over $150,000. The highest sum was around $9 million. On average, the results were between $1 million and $3 million after 30 years. 

The takeaway? Well, it just goes to show how volatile the markets can be. And since you can’t really predict what it would do, how much are you willing to risk? 

So if you’re interested in running the experiment for yourself, by all means! Try randomizing ten, twenty, thirty times. Try randomizing the rates 100 times. And take note of the results (based on a milestone such as thirty years). Then, compare that to a life insurance policy—how do those same dollars compare in an asset with certainty? 

So, the question is: how much does this improve your confidence in what you do? Try it out for yourself, and see what you think.

We hope that this new feature allows you to experiment, and play with the possibilities. It’s fun to see what the stock market might do, and how uncertainty really affects accounts. So if you haven’t updated yet, you can get the update here. And if you’re new to Truth Concepts, we invite you to sign up for your free 10-day trial.