One of the common questions we get is, “What makes Nest Egg Guru different from traditional Monte Carlo simulation retirement apps?”

Without getting too technical, the engines that drive the popular Monte Carlo apps used by advisors today generally require the programmer to enter expected mean return and volatility data. These values provide the basis for the randomization method that is used to produce the so-called “probability of success” projections. While this methodology works well when applied to situations, such as card games or roulette, where mean values and standard deviations are fixed, the problem with applying this methodology to investments is that, in the real world marketplace, expected return and volatility characteristics for various asset classes change over time.

In other words, it is pretty well established that future investment returns defy prediction. If your Monte Carlo app is using mean return and volatility estimates that turn out to be off just a bit, the projections you produce for your clients today may be worthless.

So how does Nest Egg Guru differ? Our bootstrapping methodology does not require the programmer or the user to make predictions about future expected returns or volatility. Instead, our simulations are generated through random sampling of historical monthly return data. The simulation results that are generated are not projections or predictions of any kind. Instead, the bottom half of the simulation results merely represent a range of potential outcomes that may represent average to below average return scenarios, with the bottom 1%, 5%, and 10% sims representing market conditions that are as bad or worse than anything in the historical record.

From these results you can provide your clients with the answer to the one question that worries them most– “If things go badly in the investment markets, will I still be okay?” If you want predictions, see a fortune teller. If you want meaningful, realistic stress testing, try Nest Egg Guru’s Retirement Saving and Retirement Spending apps.

John “J.R.” Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii and is a co-founder of personal finance software maker Nest Egg Guru.