Capital Sufficiency Analysis - Monte Carlo Results - PWM

CFA Level III
#1

Hi everyone,

I am studying Capital Sufficiency Analysis Topic and looking at the Monte Carlo simulation results

Monte carlo results
Monte carlo results814×652 87.8 KB

the 25th, 50th, 75th, and 90th percentile portfolio values decrease from year 10 to year 20. Additionally, the probability of success decreases from 98% to 69%. This raises a question in my mind: Why would a client choose to remain invested for an additional 10 to 20 years if the probability of success is decreasing over time? Instead of waiting for potential wealth accumulation, why not capitalize on the existing wealth?

I would greatly appreciate it if someone could shed some light on this and help me understand the underlying logic. Thank you in advance for your insights!

#2

I think the point is that further out in the future you project/run simulations, that more uncertain it gets to meet clients’ financial objectives. Remember the underlying assumptions that go into MC model - asset class, taxes, inflation, mgmt fees, etc.

#3

Thanks Iamonfireh, much appreciated!

#4

Perhaps they consider that better than the alternative: dying after 10 years.