Monte Carlo simulation
A method that creates many possible future paths instead of one fixed path. Portfolio Modeler uses many simulated paths to estimate a distribution of final values, drawdowns, and income outcomes.
Glossary
Plain-English terms used in Portfolio Modeler
Monte Carlo results are easier to use when the main inputs and outputs are clear. This glossary explains the terms that appear throughout the simulator and the educational pages.
Simulation and return terms
CAGR
Compound annual growth rate. It is the annualized growth rate that would connect the starting value to the ending value over the historical period. The simulator estimates expected return from historical CAGR.
Total-return CAGR
A CAGR based on adjusted price history, which reflects the effect of dividends and distributions. This is used when reinvested dividends are turned on.
Price-return CAGR
A CAGR based on regular closing prices. This is used when dividend reinvestment is turned off so the model does not silently assume dividends were reinvested.
Risk and distribution terms
Volatility
A measure of how much returns have moved around their average. Higher volatility usually means a wider range of simulated outcomes.
Covariance
A measure of how two assets have moved together. The simulator uses overlapping monthly returns to estimate covariance so diversification can affect the simulated portfolio paths.
Percentile
A position inside the distribution of simulated outcomes. A P10 final value means 10% of simulated paths finished below that value and 90% finished above it.
Mean vs. median
The mean is the arithmetic average of outcomes. The median is the middle outcome. In long-term investing, the mean can be pulled upward by a few unusually strong simulated paths.
Maximum drawdown
The largest peak-to-trough decline in a path. Drawdown is useful because a portfolio can finish strong while still experiencing a difficult decline along the way.
Sequence risk
The risk that poor returns arrive at an especially damaging time. It matters most when a portfolio is funding withdrawals, because losses early in retirement can reduce the capital left to recover.
Dividend, tax, and cash-flow terms
Dividend yield
Dividend payments as a percentage of price. The simulator uses available dividend history to estimate a yield for final-year income and cash-flow modeling.
Dividend growth
The rate at which dividend payments have changed over time. Portfolio Modeler estimates a dividend-growth assumption and volatility from available annual dividend history.
DRIP
Dividend reinvestment plan. In the simulator, turning reinvestment on keeps after-tax dividends inside the portfolio. Turning it off treats dividends as cash taken out of the portfolio.
Tax drag
A simplified annual reduction used to approximate recurring taxable friction, fund turnover, advisory drag, or similar costs that reduce compounding.
Starting basis
The tax basis entered for the starting portfolio. It helps estimate potential taxable gains if the final portfolio is liquidated at the end of the simulation.
Liquidation tax
A simplified tax estimate applied to modeled gains at the end of the simulation. It is not a complete tax calculation and should not replace professional tax advice.
Contribution growth
The annual growth rate applied to dollar contributions or withdrawals. It can approximate increasing savings, inflation-adjusted spending, or a planned change in cash flow.
Annual percentage withdrawal
A cash-flow option that removes or adds money as a percentage of portfolio value rather than a fixed monthly dollar amount. This can help compare flexible spending rules.
How to interpret the glossary inside the simulator
The simulator combines these terms into one workflow. Historical ticker data estimates return, volatility, covariance, dividend yield, and dividend growth. The user's inputs then determine how contributions, withdrawals, taxes, expenses, and rebalancing are applied inside each simulated path.
The output is not a promise. It is a structured way to compare the range of possible outcomes under the assumptions on the screen.