Gallery:Step 8|Step 8: Riskese

Simulated Passive Investor Experiences

Gallery:Step 8|Step 8: Riskese

One problem for investors is the high level of error when drawing conclusions from a small sample of stock market data, like the last 3, 5 or 10 years. One way to obtain an improvement in the number of observed periods is to create rolling periods with monthly or annual data that overlap from one period to the next. The overlapping period returns do have statistical problems because each period contains a substantial amount of the same data. However, since monthly returns are random and have no correlation to each other, a rolling period of 144 consecutive months out of 600 months should be similar to a random sample of 144 months out of 600 months. This random sampling with replacement is another methodology of looking at a larger sample of returns called bootstrapping. A third method to increase the number of samples is Monte Carlo simulations, which simulate future outcomes of portfolios based on a long-term historical average and standard deviation.

The interactive chart below illustrates how simulate passive investor experiences vary over time periods and index portfolios, using monthly returns data going all the way to 1928. Click the Play Button to enter an interactive playground of simulated passive investor experiences. 


The dynamic table below also contains a rolling period analysis of Index Portfolio 100 over periods from 1 month to 50 years. If you look at the red highlighted row, you will see that it covers 15-year monthly rolling periods (180 months each) and there are more than 450 15-year monthly rolling periods. As you read across the red highlighted row, you will see the median (50th percentile) return, the range of returns (highest return minus lowest return), the median growth of $1.00, and the lowest/highest rolling period dates, returns and growth of $1.00, etc. This information provides investors with an idea of what has happened over the last 50 years and over varying holding periods, based on a large sample of simulated investors. The 15-year period represents the recommended holding period for investors who score a 100 on the IFA Risk Capacity Survey.