By Michael Yelmath
Investing can be a complicated topic, but Monte Carlo simulations can help us understand how our investments may perform over time.
Let’s say you have some money to invest and you want to see how much it could be worth in the future. A Monte Carlo simulation can help you make a guess about how much money you might make in the future based on how your investments have done in the past.
A Monte Carlo simulation is like playing pretend. Imagine you have a big jar of marbles, and each marble represents a different possible outcome for your investments. Some marbles are blue, some are green, and some are red.
You shake the jar, and then you pick out a random marble. The color of the marble you picked represents how your investment did that year. If you pick a blue marble, your investment did well. If you pick a red marble, your investment didn’t do as well.
After you pick out a marble, you put it back in the jar and shake it again. You do this over and over until you’ve picked out a bunch of marbles. Each time you pick out a marble, you write down the color so you can remember how your investment did that year.
After you’ve picked out a bunch of marbles, you can look at how many blue, green, and red marbles you picked. This will give you an idea of how well your investment might do over time.
For example, let’s say you picked out mostly blue marbles. That means your investment did well most of the time. This might make you feel more confident that your investment will do well in the future. On the other hand, if you picked out mostly red marbles, that means your investment didn’t do as well most of the time. This might make you feel less confident about how your investment will do in the future.
Monte Carlo simulations are just like this game with the jar of marbles. Instead of marbles, we use a computer program to simulate how your investment might do over time. We use data from the past to guess how your investment might do in the future.
The computer program randomly picks out a possible outcome for each year, just like picking out a marble from the jar. It does this many times, just like you would if you were playing the game with the jar of marbles. Each time the program picks out an outcome, it records it so that we can see how well your investment might do over time.
For example, let’s say you picked out mostly blue marbles. That means your investment did well most of the time. This might make you feel more confident that your investment will do well in the future. On the other hand, if you picked out mostly red marbles, that means your investment didn’t do as well most of the time. This might make you feel less confident about how your investment will do in the future.
Monte Carlo simulations are just like this game with the jar of marbles. Instead of marbles, we use a computer program to simulate how your investment might do over time. We use data from the past to guess how your investment might do in the future.
The computer program randomly picks out a possible outcome for each year, just like picking out a marble from the jar. It does this many times, just like you would if you were playing the game with the jar of marbles. Each time the program picks out an outcome, it records it so that we can see how well your investment might do over time.
After the program has picked out many possible outcomes, we can look at the results. We can see how many times your investment did well and how many times it didn’t do as well. This gives us an idea of how your investment might perform in the future.
Monte Carlo simulations are a helpful tool to use when we want to make a guess about how our investments might do in the future. They can give us an idea of how much money we might make, but it’s important to remember that they’re just a guess. The future is always uncertain, and we can never know for sure how our investments will do.
In conclusion, Monte Carlo simulations are a way to use past data to make an educated guess about how our investments might do in the future. They’re like a game with a jar of marbles, where each marble represents a possible outcome for our investment. We can use Monte Carlo simulations to help us plan for the future, but we should always remember that the future is unpredictable.