What is "Backtesting"?
About Backtesting
Last updated
About Backtesting
Last updated
"We often say we wish we had bought that stock or that property at that time." How many times have we found ourselves lamenting missed opportunities in the investment world? But can we really predict when those opportunities will arise again? Experience has taught us that human beings are not very good at predicting the future. Instead, a smarter approach to investing involves building a strategy based on past experiences and reacting with logic rather than trying to forecast the unpredictable.
Building an investment strategy based on past experiences allows us to react strategically during times of high price volatility. While history may not repeat itself exactly, analyzing past trends and market behaviors can provide valuable insights into how to navigate uncertain times. Backtesting, in particular, is a powerful tool that enables us to create and refine asset allocation strategies based on historical data.
Backtesting allows us to measure the effectiveness of an investment strategy by analyzing past performance. By studying historical data, we can identify technical or theoretical flaws in our strategy and gain confidence in its ability to perform in the real market. Moreover, backtesting helps us test risk limits, identify potential areas of improvement, and optimize our strategy to maximize returns over the long term.
The more data we have, the more robust our backtesting results will be. While it's ideal to backtest over as long a period as possible, even highlighting specific time periods, known as "stress tests," can provide valuable insights. Unfortunately, many ETFs have limited historical data, but by sourcing index data from multiple markets, we can extend the data horizon and ensure that our strategies are well-tested across various economic environments. We recommend that you backtest for at least the last 10 years and preferably 20 years or more.
In the world of investing, there are no guarantees. However, by leveraging the power of backtesting and analyzing historical data, we can increase the probability of investment success in an uncertain future. In fact, we use at least 20 years of data for every strategy we offer. Rather than trying to predict the unpredictable, let's focus on building robust investment strategies that are based on logic, experience, and a thorough understanding of market dynamics.
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