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Simran Gill » tools

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ArticlesExcel Flashcard Quizzer

I’ve started studying spanish again, and to help in my studies, I devised an excel workbook to track vocabulary.

Although it is currently populated with Spanish vocabulary, it can easily be adapted to quiz you on anything you would use flashcards to learn.


It’s quite simple:

  1. Select the “Quiz” sheet and add new terms to the orange table as you come accross them
  2. Use the buttons to randomly quiz you on terms within the orange table:
    • Next – This will randomly select a term from the orange table
    • Show – This will show the definition of the currently displayed term
    • Mastered – This will move the currently displayed term off of the orange table to the “Mastered Words” worksheet
  3. To review mastered terms, just click on the “Mastered Words” work sheet and review the blue table

If you’re interested in using this approach, you might want to read this webpage – It is full of great language resources.

Hopefully you can find some use for this little tool. In addition to helping you in the language you’re learning, it would be great for those CFA LOS statements.

Excel Quizzer (4363)

ArticlesPersonal Finance and Simulation Modeling

CFA studying can be tough, and sometimes you need to take a break; During one of my study breaks, I came up with a Monte Carlo model to estimate my (or your) future net worth. In this posting I explore that model, and take you on a journey of personal finance wonderment.

The Model

A Monte Carlo simulation (at least in my model) works by generating random numbers that act as inputs into a predefined model (with appropriate assumptions). Each time the model is taken through an iteration, a different result will occur, driven by these random inputs. When the model is run multiple times, you are able to determine the probabilities that certain outcomes will occur.

Below you can see the results of several of the iterations in my model[kml_flashembed movie="http://simran.crownpac.net/blog/wp-content/uploads/2006/08/iterationgraph1.swf" height="230" width="450" wmode="transparent" /]

As mentioned above, each iteration is driven by both inputs and assumptions. The inputs for my model were the return on equity for each of the 40+ years, while the assumptions used are listed below (and are fairly realistic):

  • a relatively aggressive but realistic savings level of ~20% of personal income (decreases as a proportion of personal income over time)
  • a real return on equity of ~7%
  • inflation of ~2%
  • borrowing rate at Prime plus 1.5%
  • annual return standard deviation of ~10% with returns normally distributed
  • implementation of a properly balanced portfolio (approximating “the market” with an overall beta of 1)


As you can see, the results from each iteration appear unique. Although you can anecdotally get a sense of what you might expect to be worth by watching each iteration, the real insight comes when you start to produce a histogram (all values are shown in today’s dollars):

Probability of Net Worth at Age Seventy

Interpreting this graph, you can see that you will have a 1% likelihood of being worth $0-$2M, and a 19% chance of being worth $5M-10M. Notice that despite our assumption of a normal distribution of annual returns, the expected value of the portfolio is positively skewed: There are a greater number of very high results, and the most expected result is lower than the average.

What I find more useful than the histogram, however, are the cumulative probabilities as shown below. Interpreting the following graph, you can see that at age 70 (and with no debt in the portfolio), there is an 80% chance you’ll be worth at least $2M-5M, and a 12% chance of being worth at least $12M-15M.
[kml_flashembed movie="http://simran.crownpac.net/blog/wp-content/uploads/2006/08/leverage1.swf" height="250" width="450" wmode="transparent" /]

As with any model, the fun part comes when you play with the assumptions. I’ve included some buttons on the above graph to facilitate your play: you can choose the leverage scenario for the portfolio, and see the impact it has on the cumulative probabilities.

Notice that as you increase the debt level, your likelihood of being very rich increases, while the likelihood of being worth less remains the same? Debt in your portfolio, over the long term, is a good thing.

Downside of Debt

The graph above shows only the upside of increased leverage. There are, of course, downsides that will ultimately determine the optimal balance of debt and equity for your portfolio. What are the constraints that should limit debt exposure and determine your optimal capital structure? read away:

  • Portfolio value variability - Your personal risk aversion level determines how much you can take. My personal feeling is that many investors are overly cautious when it comes to use of leverage, but not careful enough when it comes to individual stock selection vs asset allocation. Using a monte carlo model can help you quantify the risks, and determine what level you really should be at.
  • Probability of Bankruptcy (and associated costs) – Because the costs of personal bankruptcy are so high, any chance of total portfolio loss should be avoided. Fortunately, bankruptcy only becomes an issue at extremely high levels of leverage; well beyond the 65% leverage scenario I included above (I ran a test on the simulation, but have not included it in this posting)
  • Greater demands on cashflow management – The impact on the portfolio resulting from margin calls, and portfolio rebalancing adds extra cost and care to managing the portfolio
  • Greater Need to rebalance portfolio - Changes to asset class values will be magnified by the use of leverage. Depending on your rebalancing approach, this could add significant costs
  • Increased borrowing costs at higher debt levels – This depends on how big you shoot. If you are pushing 8 figures, you might want to read up on some Miller and Modigliani


There are many more variations we can build off of this model. For instance, if you where interested how soon you could expect to be worth $5,000,000, you could use the following graph:

Probability of $5MM Net Worth at Various Agescash by age

With a little bit of work, we could also examine:

  • How often periods of low cashflow would occur
  • How often Portfolio rebalancing would be necessary
  • Likelihood of bankruptcy
  • Optimal portfolio construction

Whatever you are interested in, the model can be built to examine your needs.


Despite the long post, this is a relatively brief look at what these kinds of models can do for you. Some takeaways:

  • Modeling brings Clarity – Despite the uncertainty around future market returns, you can develop rational expectations on where you will be in the future by using tools like simulation modeling. Combine a knowledgeable financial modeler with powerful computing, and a model can be adapted to address any issue that you might be concerned with.
  • Time is your Friend – When you no longer have the ability ski moguls because your knees are titanium, you can take comfort in the fact that you can cruise the Mediterranean, be a philanthropist, or buy a fancy Skoda. You already know that it is good to save, but it is nice to be able to quantify it.
  • Debt is your Friend – Assuming you’ve got time (measured in decades), it probably makes sense to bite off some debt. You’ve seen above the result of adding leverage to my model, and the resulting net worth values are large. Always remember however that there is a big difference between consumer debt, and leveraged investments; make sure your debt is working for, not against you.

I hope you found this long and flashy post interesting. Let me know if you have any comments or questions.


ArticlesSpam and OpenSource

This site has been getting slammed by Spam over the last week or so, with up to 120 Spam comments being posted per day. My inbox was overflowing, so I had to make some changes.

Comments are now improved. There is no moderation, and they will be posted as soon as they are submitted – the catch is that you have to enter a small code before it will be accepted. A small price to pay, no? The comments on the daily links section, however, have been temporarily suspended. Because of the coding I’ve used on that section, they’ll have to be upgraded at a later time.

The blogging system I use for this site is WordPress, and it has been an excellent choice. Since I switched over form greymatter about a year ago, the community has grown exponentially, and it has become the new leader in blogging tools. One of the great benefits is that it is opensource – anybody can look at the code, and make improvements, and the best improvements get included in the next versions of the software. In putting the site together, I’ve definately “stood on the shoulders of giants”. Mixing and matching different techniques, and using it as a learning tool.

WordPress has been a great learning tool, but blogging definately isn’t for everybody (if you want to start playing around with it, let me know – and I’ll direct you to some more resources). There are , however, some great new opensource programs that I’m anybody could love.

Mozilla Firefox

I’ve meant to mention this a long time ago, but have never got around to it. This is a replacement for Internet Explorer (IE), and it has been getting tons of press lately.

If you’re not sure what Internet explorer is, I’ll provide a quick analogy. First off, both IE and Firefox are web browsers. What is a web browser? it is the way to get websites off the internet. A web browser is to the internet, what a TV is to the TV Channels.

So, according to this analogy, your favorite search engine, google.com, is analagous to your favorite televistion station, FOX TV – Meanwhile your old browser, IE, is analagous to that old hitachi black and white TV your grandma had. If you’re ready to step up to the world of high definition, you’ve got to see Firefox – It’s the internet’s version of a 50 inch LCD flatplanet wide-screen HDTV.

With Firefox, there are tons of great plugins that you can use to customize your browsing. I’ll give you an example of how I’ve used mine. I’ve been trying to practise my spanish lately, and while I’m reading spanish website, I occasionally come to a word I don’t know. With the Conquery Firefox plugin, all I do is select the text, right-click, and a separate window (or tab) will open up with an english translation of the word – and this works on any website.

Here’s a list of some the other plugins I’ve been using:

  • Sage - An integrated RSS reader
  • Mouse Gestures – Custom Navigation – no need to ever press the “back”, or “reload” buttons
  • IE View - Opens a site in IE, this is useful if the site has a bad design, and won’t work in Firefox. An occassional nuisance and disadvantage resulting from IE’s overwhelming marketshare
  • Gmail Notifier – Let’s me know when I’ve got new Gmail
  • Bug-Me-Not – This is great for websites that are free, but require registration. Saves alot of time while reading the news
  • Web Developer – This is priceless for anyone who does webdesign work. You’ve got to pick this up.

Here are some key built in features that make switching worthwhile: tabbed browsing, live bookmarks, faster load times, built-in pop-up blocking, no more spyware, customizable themes.

I’ve been using it since version 0.6 – it’s now at 1.0 and is definately ready for mass adoption.

Mozilla Thunderbird

Thunderbird is an Email client, News reader, and RSS reader all in one.

It’s currently at version .9 and is slightly less polished than it’s cousin Firefox – Nonetheless, I’m very impressed with the progress the program has made.

It is the best free RSS reader I’ve found – and does a great job of integrated mail, news and RSS together. If there was an integrated calendar, and pocketPC sync support (my old axim X5), I would have no hesitation switching from Outlook (I use Lotus Notes at work, but that is another story).

The last time I used thunderbird I was dissappointed. The interface was not at the level I was expected, and it was missing some key features – like integrated RSS. The latest version has surpassed my expectations, and surprisingly, I prefer the interface to Outlooks – They have even added the mail grouping function I love so much.

Bottom line is that if you don’t use calendar, and don’t have a pocketpc (I think palm is OK) – you’ve got the see Thunderbird.