Modeling Market Corrections | 001

James and Jassen got together for the very first “Office Hours for Professionals” to introduce the Real Estate Financial Planner™, who it’s for, and why those offering professional services ranging from Real Estate Agents to CPA’s and Financial Advisors can benefit from using this software. In this session James shows you how to quickly setup a Scenario, add an Account, and apply different Rules to model a market correction. He also demonstrates how Rules can be set so that projected yields from stock market investments mimic the real world volatile performance of the stock market. Towards the end you even get a quick introduction to Monte Carlo simulations and Expected Value both of which are incredibly useful when projecting likely future outcomes for investment strategies.

Watch the video of the presentation here.

You can also listen to this episode on our podcast using the player below.

Modeling Market Corrections Episode 001 – February 5, 2019

Episode Overview

  • What is the Real Estate Financial Planner™ and why was it created?
  • Who is this podcast for?
  • What are Office Hours?

Created Scenarios

[001] Stocks with Market Correction Sample

This Scenario allows us to model a market correction. The variables we input are listed below and all others were left at their default settings.

  • Duration: 480 months
  • Target Monthly Income in Retirement: $10,000

Then we added an Account to model investment in the stock market. We changed the following variables as below and left all others as their default.

  • Opening Balance: $10,000
  • Yearly Rate of Return: 8% fixed

Next, we created a Market Correction Rule with the following inputs.

  • How Frequently: 1 of every 60 Months
  • Applies to: Stock Market Account
  • Low of Random Range: 0
  • High of Random Range: 20
  • Minimum: 0
  • Maximum: 20
  • Standard Deviation from Mean: 5
  • Step Value for Normal Distribution: 0.10

If you’d like to copy this Scenario into your Real Estate Financial Planner™ you can do so by clicking the button below.

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001 Stocks with Market Correction Sample with 2 Accounts, 0 Properties, 1 Rule, 1 Goal

[001] Stocks with Random Return

For this next Scenario we wanted to model real-life outcomes for an investment in the stock market so we created a copy of the previous Scenario, removed the Market Correction Rule and added a Set Value on Accounts Rule. Then we set the variables as below and applied it to the Stocks – Earning 8% Account.

  • Which Account Variable: Yearly Rate of Return
  • Action Type: Set Random Value from Normal Distribution as Value
  • Low of Random Range: -20
  • High of Random Range: 40
  • Minimum: -20
  • Maximum: 40
  • Standard Deviation from Mean: 8
  • Step Value for Normal Distribution: 0.10

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001 Stocks with Random Return with 2 Accounts, 0 Properties, 1 Rule, 1 Goal

[001] Stocks with Random Return – Run 1

This Scenario as well as the [001] Stocks with Random Return – Run 2 Scenario are both copies of the [001] Stocks with Random Return Scenario. No changes were made to the inputs. When we compare these three Scenarios on a single Chart we can see that employing random returns really does create different results giving us a range of potential outcomes when modeling investing in the stock market.

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001 Stocks with Random Return - Run 1 with 2 Accounts, 0 Properties, 1 Rule, 1 Goal

[001] Stocks with Random Return – Run 2

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001 Stocks with Random Return - Run 2 with 2 Accounts, 0 Properties, 1 Rule, 1 Goal

[001] Stocks with Random Return – 10 Monte Carlo

The final Scenario we discuss in this episode is another copy of the previous Scenarios. The only change is that we will enable Monte Carlo simulations and input 10 runs. This Monte Carlo simulation will use random numbers for the rate of return each month and runs 10 iterations of this Scenario. The range of outputs is aggregated over a distribution curve which shows you how likely you are to achieve different results based on this model.

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001 Stocks with Random Return - 10 MC with 2 Accounts, 0 Properties, 1 Rule, 1 Goal

Skills Covered

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