19 terms, written to be read on their own. Where we have published original simulation research on a concept, the entry links to it.
All terms, A to Z
Asset allocation
The split of a portfolio across asset classes — equities, bonds, cash, and others — which is the primary determinant of both its expected return and its volatility.
AUM fee
A fee charged as a percentage of the assets a manager oversees, typically 0.5% to 1% a year, billed regardless of whether the portfolio gained or lost.
Decumulation
The phase in which a portfolio is being spent rather than built, and the set of decisions — how much to withdraw, from which accounts, in what order — that go with it.
Drawdown
The peak-to-trough fall of an investment portfolio, from a previous high to the lowest point that follows — not an accounting withdrawal of capital.
Expense ratio
The annual percentage a fund charges against assets to cover its own running costs, deducted from the fund’s value rather than billed to you.
Fee drag
The cumulative reduction in a portfolio’s final value caused by annual fees, including the compounded growth those fees prevented.
FIRE
Financial Independence, Retire Early: saving a high share of income so invested assets can cover living costs decades before a conventional retirement age.
Glide path
A predetermined schedule that shifts a portfolio from higher-risk to lower-risk assets as a target date approaches — the mechanism inside target-date funds.
Guardrails (Guyton-Klinger)
A withdrawal policy that starts from fixed spending, then cuts it when the withdrawal rate breaches an upper band and raises it when it falls below a lower one.
Leverage
Borrowing to hold more of an asset than the cash stake would allow. A 2× overlay owns two dollars of equity for each dollar of capital and finances the other dollar.
Monte Carlo simulation
Running a plan through thousands of randomly generated market sequences to report a distribution of outcomes, instead of one path from an average return.
Probability of success
The share of simulated runs in which a plan funds its spending through the full horizon without exhausting the portfolio.
Real return
Real return is the change in purchasing power after inflation: a 7% nominal return with 3% inflation is roughly a 4% real return.
Rebalancing
Periodically selling what has grown and buying what has lagged to return a portfolio to its target asset allocation.
Ruin rate
The share of runs in which a plan exhausts its portfolio before the horizon ends. A 5% ruin rate means the money ran out in one simulated run in twenty.
Safe withdrawal rate
The share of a portfolio’s starting value you can withdraw in year one of retirement, then raise with inflation each year, without running out over your horizon.
Sequence of returns risk
The risk that the order in which investment returns arrive damages a plan, even when the average return is unchanged. It matters most when money is being withdrawn.
The 4% rule
A rule of thumb from William Bengen’s 1994 research: withdraw 4% of the portfolio in year one of retirement, then raise that amount with inflation each year.
Volatility drag
The gap between the average of a series of returns and the compound growth actually achieved. Higher volatility widens the gap, even with an unchanged average.