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Showing posts from October, 2020

Use of Monte Carlo Simulation in Financial Planning

Monte Carlo Simulation: What is it? It is a technique used to understand the impact of risk on the  outcome of any project, wherein the impact of the risks can't be forecasted using traditional techniques. The source of risk is mainly the uncertainties related to the various inputs. The uncertainties of input would generally follow a probability distribution. For example, the market returns tend to follow the normal distribution and inflation tends to follow the lognormal distribution. The Monte Carlo Simulation (MCS) converts the uncertainties of the inputs into probability distributions, chooses values randomly from the distributions of each of the inputs, feeds them into the model of the project, and generates the output. MCS repeats this process thousands of times to produce a range of possible outcomes with the probability of their occurrences. MCS: Use in Financial Planning We take a simple example to illustrate the use of MCS in financial planning. Suppose a client needs to

Seven lessons for an adviser from the Bhagavad Geeta

We know that Lord Krishna recited the Bhagavad Geeta as a message to his friend and disciple, the warrior prince Arjuna. However, Lord Krishna does not utter a single word in the first chapter. He speaks for the first time only in the 2nd shloka of Chapter 2. That too was just a casual question as a friend. The real advice starts only from the 11th Shloka of the 2nd Chapter. Till then, he listens to Arjuna. You see, even the God does not jump to answer without allowing the disciple to speak his mind and without understanding Arjuna's point of view. Understand the importance of listening before you offer any advice or solution.In the first two shlokas of the 3rd Chapter, Arjuna asks the Lord, “Please tell me what is right for me.” It was equivalent to a client asking you, which is the best fund. The God could have told him – do this; instead, he explained the theory of karma. Bhagavan Krishna does not recommend anything, but only shows Arjuna the consequences of various actions and