For carrying out simulation efficiently, a lot of data is required. The greater the availability of information, the greater the ease and accuracy in designing and implementing a simulation run. Proliferation of personal finance sites on the Internet is likely to prove useful to those who are interested in conducting simulation. Some personal finance sites available currently are Moneycontrol.com, Rediff.com, Indiafn.com, Finishts.com and Indiainfoline.com.

Greater availability and affordability of personal computers nowadays makes it possible for individual investors to carry out simulation to test their investment hypotheses and strategies. But any simulation necessarily involves identifying relevant parameters and making certain assumptions. It is important to make explicit and realistic assumptions if we want simulation to be more accurate.

In carrying out simulation, realistic amounts should be taken into account. Just because simulation does not involve making actual investments, absurd figures should not be used. We should be meticulous while doing calculations in a simulation for income-tax brokerage; lead times involved in various transactions should be taken into consideration as well.

It would be well to realise that simulation can give us an idea of the efficacy of various investment strategies, but it is devoid of emotions like anger, fear, greed, etc. In real life, such emotions do affect the investment performance of individuals. Investors do not remain totally immune to the psychological effects of what is going on in the stock market. The grapevine affects them just as much.

It should also be realised that simulation carried out during a bull phase may not hold good for a bear phase and vice versa. If the results of any simulation run are highly encouraging, it does not mean that very high sums of money should be invested immediately using the same investment strategy.

The reason is simple. Assumptions and market conditions underlying a simulation run need not necessarily hold good at the time of actual investment. Thus, simulation should be used only to get an idea of the expected impact of the proposed strategy. The results of simulation should be taken as indicative in nature and as a general guide only. A final decision should not be taken solely on the basis of simulation.

Different approaches or strategies of investment can be tested by means of simulation on a retrospective basis, too. This can be done as one can get actual data for years/months. These strategies can be tested for different periods in the past covering bullish as well as bearish phases of the market. On a prospective basis too, for future periods, simulation can be carried out. But this will mean losing time as some time will elapse before these strategies can be tested and actually applied.

Simulation is a useful technique. Its potential has not been adequately exploited as yet, though. It is both logical and desirable as it tries to replicate the reality and tries to make sense of a chaotic stock market. In view of these potential benefits of simulation, it is imperative that we take it seriously to find out the implications of any new strategy or approach before actually implementing it. This can prevent many pitfalls and save investors from difficult situations.

But simulation is not without its limitations and these need to be understood in order to be able to make use of this powerful technique and prosper.