My Finance

We have updated annual simulator. The current version uses two factors: S&P 500 volatility and BAA bond rate. Initial factors are from May 2025. We simulate portfolio of three classes of assets:

• Standard & Poor 500 USA Stocks
• MSCI EAFE Developed Markets Index Stocks
• USA Investment-Grade Corporate Bonds, ICE Bank of America Index

We use the following autoregression equations for factors:

with and

with and

For corporate bonds, US stocks, and international stocks, denote their annual arithmetic total returns in % as

• with and
• with and and
• with and and

All five series of residuals are well-modeled by independent identically distributed random variables, judging by Monte Carlo simulation. Unfortunately, they are not normal. Namely, and (the innovations for factor autoregressions) are closer to skew-normal. I did not yet pursue this direction of research. But the other three residual series are Gaussian.

However, I still modeled these five series as multivariate Gaussian with mean vector zero and empirical covariance matrix

We consider only nominal, not real returns. To compensate for that, withdrawals/contributions can change annually.

We allow for constant split between US and international stocks. Bond and overall stock percentages might change from year to year linearly. This is to allow for a more conservative portfolio as time goes.

We use May 2025 averages for initial factors: volatility (using rescaled VIX) and rate.

See the https://github.com/asarantsev/simulator-current