|These games will help you to visualise
the consequences of your asset allocation decisions.
UKSA does not have the resources to develop these
games, but in concept they are quite simple. The material already
exists with any of the major investment advisers to pension funds.
They have developed these techniques to help trustees chose investment
strategies - which is exactly what is wanted here, but with different
levels of sophisitication geared to different target audiences.
The idea is to help the saver develop an understanding
of the risk consequences of his investment plan, and an understanding
of his own feelings were 'bad things' to happen, and therefore an
insight into his risk preferences. Technical stuff follows.
It is possible to simulate the results of investing
over time in particular asset classes allocated in particular proportions.
The base data is the probability distribution of annual returns
and the covariances of each pair of asset classes. Monte Carlo methods
are used to simulate the results of any investment strategy and
can be presented in many different non-technical and/or visual ways.
- the player can follow the year by year results,
playing one year at a time
- the player can see how often he beats all-cash
over different periods
- the player can see the probability of specific
events (e.g. losing more than X%)
- by allowing the player to make changes dependent
on annual outcomes, (for example, increasing savings rates when
cumulative perormance falls below a threshold) a game can allow
the player to learn whether he can cope with the worst outcomes
of his investment strategy.
|Learn about 'Return' now: