- Includes the impact of portfolio rebalancing
- Ideally, the backtest should cover a period long enough to cover at least two full market cycles. This is normally about 10 years.
- The process should be shielded from hindsight bias in the security selection
- The Portfolio Backtest must have a separation from the information that would be used to create the portfolio at the time of investing and the test results of those decisions. Investment professionals call this Out of Sample because the rest are tested outside of the sample data used to create it.
- Ideally, the backtest includes the impact of other lifecycle portfolio management decisions. Portfolio are more than just a collection of assets. Additional decisions such as when to take a profit, when to take a loss, when to hedge, when to increase or decrease overall exposure – all these things matter, and full lifecycle portfolio backtesting accounts for it.
- The results of the portfolio backtest must be presented in a manner that allows the investor to truly understand the investment strategy. Investors need more that just what the strategy returned. What are the risks? How does the performance compare? What did the portfolio hold at what times? Is it diversified?
- The portfolio backtests should work with your actual investments. Limitations on the backtest to a particular asset class or instrument may fail to capture your true strategy and dilute the relevance of the Backtest.
- The Backtest should be optimized! It sounds obvious but the backtest of a basket of stocks or bonds that are equally weighted or randomly allocated leaves money on the table and dilutes the potential of the strategy.
- A portfolio backtest can set reasonable expectations for future performance.
- A portfolio backtest enables the investor to test multiple strategies and variations without risking money or spending years accumulating actual investment results.
- A Backtest provides the Chassis that an investor can fit with to protect the investor from dangerous self-inflected decisions.
- Having your own backtest allows the results to be fully personalized, so it is relevant
- Backtesting your Portfolio is objective. A backtest is a truth telling engine. Maybe it is good, maybe it shows the strategy is too risky. Either way, you get the knowledge and you can choose.
- Backtesting is deliberate. The worlds best investors are always deliberate with their investment decisions.
- Includes periodic Re-Optimizations of the investments so each Re-Optimization provides an optimal weight for each investment based on the information that would have been available at that time. The more Re-Optimizations the better as each optimization diversifies the risk that the portfolio performance was a function of getting in on a great company early and riding it. The Backtest should backtest the strategy, not merely a collection of assets.
James’ professional orientation points at the zenith (and sometimes nadir) where technology and investments intersect. He is a Fintech entrepreneur and has served twenty years of a lifetime sentence.
James is a patented inventor, quant pioneer and investment manager. He is the founder of Gravity Investments, a unique investment and technology services firm centered on James’ inventions for diversification measurement, optimization, visualization, and analysis. In the development of the platform, James has pioneered A.I applications, diversification attribution, down-side diversification, portfolio re-optimization, full-lifecycle strategy optimization, programmable investment policy statements and core-satellite optimization techniques.
In working with advisors, funds and money managers as both a strategic sub-advisor and software consultant, James has consulted and trained hundreds of professional investors on portfolio design and optimization. James has a unique ability to look at any investment process and find practical, intelligent and often quantifiable opportunities to improve the investment product.
Inspired by the work of Nobel Laureate Harry Markowitz and the efficient frontier, James has championed and pioneered the science of diversification. James’ technology has advised
or assisted in over 30 Billion dollars of investor capital. His vision of a more perfect investment management system is at the heart of Gsphere ( www.gsphere.net )
His passion for performance, curiosity for the unknown, and drive to excel empower his service to investors.
James is Founder and CEO of Portfolio ThinkTank (the B2C company) www.portfoliothinktank.com, Founder & Chief of Financial Engineering at Gravity Investments www.gravityinvestments.com (the B2B company) and Chief Investment Officer at Gravity Capital Partners, a wholly owned SEC Registered Investment Advisor.