Why You Should Avoid Simplistic Monte Carlo Results and Create a Real Financial Plan Instead

Ready For Retirement

James Conole, CFP®

Investment Planning, Bonds, Education, Stocks, Cash, Business, Dividend Investing, Retirement Planning, Retirement, Investing, Tax Planning

5 • 706 Ratings

🗓️ 17 December 2024

⏱️ 20 minutes

🔗️ Recording | iTunes | RSS

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Summary

Are you mistaking a Monte Carlo analysis for real financial planning? I'll explain why this common tool, often used by financial advisors, is not a substitute for a true financial plan. A Monte Carlo analysis provides probabilities of success based on investment outcomes, but it doesn’t offer actionable steps, strategies, or a clear path to achieving your goals. I’ll break down the benefits and limitations of Monte Carlo simulations and show you what real financial planning should deliver: c...

Transcript

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0:00.0	I'm often shocked when I hear clients described what their financial experience looked like with their previous advisors before the beginning work with our firm, Root Financial.
0:07.0	And while this episode is not going to be a sales pitch, what it is going to be is going to shine the difference between what real financial planning is, in my opinion, and what most people pass off as financial plan.
0:19.4	This is another episode of Ready for Retirement.
0:21.9	I'm your host, James Cannell, and I'm here to teach you how to get the most of the
0:24.8	life with your money.
0:26.2	And now, on to the episode.
0:29.7	So going back to my conversations with clients, I'll say, tell me about your experience,
0:33.3	working with your previous advisor, and they'll tell me.
0:35.4	They'll say, you knew our advisor had us fill out a fact finder.
0:37.4	When do you want to retire? How much do you want to spend? What are some of the
0:40.5	goals that you have? And they come back to us with a sheet of paper, and that sheet of paper has a number on it.
0:45.4	And that number gives us what it's calling a probability of success. It might say 90%, it might say 77%. It might say 100%, but that's measuring the probability of success
0:55.1	of our plan. And that's... And I'll ask if there's anything else. And the clients will say,
0:59.7	no, that is our financial plan. Anytime we talk to our financial advisor, we get an updated number.
1:04.4	And that updated number gives us an updated probability of success. And to them, that's what
1:09.1	financial planning is. So in this episode, I'm going to tell
1:12.4	you why that is not financial planning and what financial planning should be. What that is, is that's a
1:18.7	Monte Carlo analysis. And a Monte Carlo analysis can be a helpful tool, but only in specific areas.
1:24.8	You should never confuse Monte Carlo analysis for an actual financial plan.
1:29.1	This is why. A financial plan should show you what's possible. It should give you steps to take
1:33.5	to arrive at your goals, specific things you should be doing. And finally, it should uncover the right
1:37.5	strategies to optimize everything that you've worked for and do so in alignment with the way that you
	...

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