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When introduced to something new and innovative, people tend to interpret the new idea using ideas with which they’re already familiar. This is true of our Goals Optimization Engine in that people often assume the probability score generated by GOE is calculated using a Monte Carlo simulation. That’s understandable because the result of a Monte Carlo simulation is also a probability score, stated as a percentage of likelihood. However, GOE does not use Monte Carlo because Monte Carlo is not well suited to GOE’s mission of determining the appropriate mix of assets to hold at a given point in time.

In fact, if one were to use Monte Carlo as the calculation method inside GOE, it could take anywhere from several hours to literally millions of years to produce an answer. Instead, GOE uses a method known as dynamic programming, which can produce a result in seconds while still considering millions of possible outcomes across the time frame of a particular investment goal.

In this paper, we explain the use of dynamic programming within the Goals Optimization Engine (GOE®). In doing so, we will contrast the dynamic programming methodology with Monte Carlo analysis, a staple among modern financial planning tools. We also look at:

  • GOE asking a question only dynamic programming can answer.
  • Dynamic programming can work better, faster—and backwards.
  • Managing the portfolio in “forward time” as gains or losses occur.

Readers interested in a broader understanding of GOE and goals-based wealth management should also read our other paper entitled “The missing link: Connecting goals-based wealth management to investing.”