Portfolio Backtesting

• Optimization Engine
• Financial Content

A backtest is a risk and reward assessment tool for wealth management optimization. A backtest aims to provide evidence of an investment strategy's viability and potential for return. A backtest simulates market performance using historical trade data to replicate the current market to predict future behavior. A trading strategy is applied to the model, and the performance is tracked. If the investment strategy performs poorly in the model, it may indicate risk in the proposed investment strategy. A good backtest is considered a strong indicator of investment potential. Though professional investment advisors typically do them, thanks to modern trading, the individual trader can do it a home. Portfolio backtesting takes this one step further. A trader can test their portfolio's performance in a large backtest or series of backtests. A backtest alone is not enough to prove the value of an investment strategy. It is just one of the tools in the portfolio management arsenal of professional and individual investors.

Portfolio Backtesting Benefits

Portfolio backtesting enhances returns on your managed portfolios and reduces exposure to risk by testing your optimization strategies forward to develop rebalancing techniques that maximize your risk-adjusted returns on your investments. Macroaxis backtesting module allows investors to evaluate the effectiveness of their optimization strategies by instantly exposing real-time backtesting results emphasizing trade-offs between risk and returns.

Who Uses Portfolio Backtesting?

Portfolio backtesting is a part of the services a wealth management company may provide a customer to help them build the strongest portfolio possible. Many investors trust good backtests and find them reliable when implemented correctly. Backtesting is also critical in automated algorithm-based trading software also uses backtesting models to frame their behavior. Wealth management experts and individual investors use backtesting to access trade strategy risk and reward. Backtesting software varies from each firm and online trading service that offers one. Each is coded with proprietary software and built differently. They all work the same in the sense that they build performance models of investment strategies based on selected historical trade data. A lot of work goes into selecting data that can best replicate the current market, and access to the information can be quite expensive. Backtesting is a skill. Even the most user-friendly backtesting tools available online require advanced trade knowledge, research, data collection, and familiarity with the software interface. Learning to use the software correctly to gain its full benefit is critical to making it as accurate as possible. It might be accurate to say that you only get out what you put in. Cost, accessibility, skill are all factors. Backtesting has been proven to a reliable tool on the investor's portfolio optimizing tool belt. When combined with other indicators, a good backtest can help create a strong case for the potential return on investment.

Backtesting Isn't Perfect.

Every trading website that offers backtesting software uses proprietary software, and that different features and different tracking metrics, all backtests aren't created equal. The same is true of professional services offering backtesting as part of their portfolio management. Individual traders using online trade software to backtest has a few drawbacks for its users too. Traders run the risk of imposing bias on their backtesting, and they can cherry-pick data. Failure on the trader's part to be honest with themselves might result in a backtest that incorrectly represents a trading strategy's viability. Pulling the trigger on a trading strategy backtested with the Data or data will have inaccurate results, which could have disastrous consequences as the plan fails to perform. Skilled investment professionals will see a good record of past performance as only an indicator of future performance potential. The backtest alone does not guarantee anything and cannot predict what will happen in the future market. Though it is a useful tool, it is only one of the many tools used in professional portfolio optimization.

The Bottom Line

Portfolio Backtesting can be defined as going back in time using a current asset allocation settings and examining how it performed over a given time interval against a selected benchmark. The Macroaxis backtesting tools show the results over time in a graphical form along with all of the critical portfolio health indicators such as Information Ratio, Sharpe ratio, Standard Deviation, Maximum Drawdown, and many others. Many investors will seek professional help with backtesting to avoid the skill and learning curve associated with it or because they want expert help in building the best portfolio that they can.

Macroaxis Portfolio Backtesting Methodology

The Macroaxis Portfolio Backtesting module uses many of our existing functionality around portfolio optimization and performance evaluation to simulate portfolio performance using historical data. You can get a good sense of how your portfolios performed over the selected horizon for its overall stability, volatility, and elasticity to market changes. We, by no means, assert that our module and portfolio backtesting, in general, will be perfectly suitable to alter your current investment strategies or wealth management policies, market timing assumptions, or asset allocations decisions. However, if you find your backtested portfolio performance significantly alarming, it could be a good sign to reconsider your existing strategies.