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Spend Some Time With a
“Supermodel”
How a Monte Carlo simulation
will help you retire.
By Glenn G. Kautt, CFP, EA
The Monitor Group
Who is going
to “guarantee” your financial future? Of course, only you can
“guarantee” your financial success through hard work and perseverance.
However, you can increase the odds of success by working with a
competent and well-trained professional advisor Certified Financial
Planner and creating a financial blueprint through the use of a
Stochastic Model.
What’s wrong with the old methods?
Most financial
advisors still use an old model of retirement analysis to determine if
their clients will be able to afford to retire. A wide array of
planning tools sprung from the popularity of electronic spreadsheets,
and they all share one trait. Stated technically, they are all
deterministic models. Stated in plain English, these models give a
single answer. Deterministic models use variables such as rate of
return, or inflation and the outcome is usually stated as a single set
of numbers or a graph. These models give literally average results. The
problem is your life isn’t average, and the chances of your actual
future coming out exactly average is quite remote. Thus, a
deterministic model’s result is usually inconsistent with reality.
Your future with a
supermodel
Stochastic
Modeling, delivers a more realistic range of projections with up to a
95% probability of occurrence. This technique, also called “Monte
Carlo,” simulates thousands of lifetimes based on a rate of return, a
standard deviation, and a measure of volatility. This analysis exhibits
numerous projections of possible results and provides users with a
specific range of probability of occurrence. Knowing the probability of
the outcome allows you to modify your goals and portfolio investments to
boost your odds of success.
Stochastic Modeling is not a new mathematical concept. In fact, some of
the statistics used to develop these planning models were developed over
100 years ago! Previously, statistical modeling was performed on a
centralized mainframe computer, and the process was slow and
inefficient. Calculations might have taken several hours to complete,
with a comprehensive analysis lasting weeks or months and costing
thousands of dollars. Now computers have become powerful enough for
financial planners to run these complex calculations in only a few
minutes.
*****
Glenn Kautt is President of The Monitor Group, Inc., a fee-only financial planning firm located in the Tyson's Corner area of McLean, Virginia. As a nationally recognized wealth management firm, The Monitor Group provides investment and financial planning services to more than 190 high net worth client families in Northern Virginia, Maryland, Washington, DC and across the country. Click
here for more information about Glenn and The Monitor Group Inc.
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