When you estimate what your portfolio will do over time, you might build an Excel spreadsheet to project the results-making assumptions about how each part of your portfolio will perform.

For example, let's say you have $100,000 to invest. You assume that the asset classes will produce the following annualized returns:

Stocks	9%
Bonds	5%
Cash Equivalents	2%

 
Now let's assume that your allocation is:

Stocks	70%
Bonds	20%
Cash Equivalents	10%

If all your investments follow exactly this pattern for ten years, the portfolio would then be worth $213,722, for an annualized return of 7.89%.

This sounds realistic. But it's only one of a wide range of possibilities. In real life, stocks often return much more-or much less-than 9% a year. Bonds and cash equivalents also have their fluctuations, although they are usually less dramatic.

So there could be wide variations around this deceptively specific estimate. But how wide? How good, or bad, could it reasonably get?

Imagine a bad, but by no means impossible, scenario: over those ten years, stocks lose 5% a year, bonds lose 2% a year, and cash equivalents are flat. Then your $100,000 stake would be down to $68,253, for an annualized return of -3.75%.

In a good-but again, not extreme-scenario, stocks gain 12% a year, bonds gain 6% a year, and cash equivalents gain 3% a year. Your $100,000 would have grown to $266,665, for an annualized 10.31%.

Reality will probably be somewhere in between-but not necessarily. And how can you quantify the chance that your stake will reach a point that will get you to your investment goals?

Enter Monte Carlo simulation. This estimation technique allows for the wide range of possible percentage changes in each asset class-and, therefore, the even wider range of possible portfolio values over your time horizon. Using thousands of scenarios, Monte Carlo simulation charts the relative likelihood of portfolio values. This enables your financial advisor to estimate the probability of reaching your goals.

For more information on Monte Carlo simulation and how it may be able to help you reach your financial goals, contact your financial advisor.

IMPORTANT: The projections or other information generated by Envision regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

Envisions' simulation model incorporates assumptions on inflation, financial market returns and the potential relationship between these variables based on an analysis of historical data. Using Monte Carlo simulation, and data provided by the Center for Research in Securities Pricing, Envision simulates 1,000 different potential outcomes over a lifetime of investing. The varying historical risk, return, and correlation between the assets is based on indices over several market cycles. If the indices do not provide sufficient historical data to gauge asset class performance, we may use the performance statistics of related asset classes.

Unlike financial planning, Envision does not include a detailed analysis of insurance, real estate investment or savings strategies. It also does not cover estate and tax planning.

Returns and probabilities generated by Monte Carlo Simulation are based on historical and hypothetical information; there is no guarantee that actual future results will perform in accordance with the probability assessment.