Personal Investments • Randomly generated rates of return while simulating market crashes

I know stock returns are not normally distributed. Acknowledging this fact, can someone please shed some lights whether my thought process (shown below) makes sense and if I'm being too conservative?

• Portfolio's historical average rate of return: 10.7%

• Portfolio's historical standard deviation: 7.7%

• Assumed ceiling for randomly generated returns: 15% (this is to avoid crazily large randomly generated numbers)

• Assume 2 times historical standard deviation to cover 95% of cases (assuming a normal distribution)

• Assume the market crashes a number of years throughout my retirement by 20%

Random rate of return in non-crash years = norm.inv((rand), 10.7%, 2*7.7%) but less than 15% (I'm using Excel functions, which basically find a random number with mean = 10.7% and standard deviation = 2*7.7%)

In each crash years: rate of return = -20%

Thanks in advance for your time and help!

Statistics: Posted by Cincy_1988 — Wed Dec 18, 2024 11:24 am — Replies 3 — Views 50

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