In the arsenal of sales tools the finance industry uses, the backtest is surely one of the most paradoxical.
Investopedia defines backtesting as “the process of testing a trading strategy on relevant historical data to ensure its viability before the trader risks any actual capital.” Essentially, it’s a simulation of the past with the added benefit of hindsight bias. Jason Zweig in The Devil’s Financial Dictionary, is more acerbic, if not accurate, with his definition:
Backtest, v. and n. To comb through financial databases to determine which investing strategy would have worked the best if anyone had known about them at the time. Many asset managers then use the backtest as a way to extract money from clients in the present—and disappoint them in the future.
Backtesting is placing the bet after the race. This is, perhaps, a little unfair as backtesting has the potential to yield interesting, if not always useful, insights. Still, much depends on the quality of the backtest and, particularly, its timeframe. The self-selective nature of backtests means that one tends to hear a lot more about investing strategies that worked under certain parameters and specific timeframes than those that didn’t. In this way, the backtest offers little in the way of learning for the new investor.1
Might then I propose the concept of forward-testing, wherein you take a past prediction and see how it actually performed.2
Continue reading “Forward-Testing: Teaching Myself to Test Different Investment Portfolios”
There is a certain type of person. They are the kind that asks complicated questions about simple things without ever knowing what they mean. They conflate sounding smart with being wise. Despite the veneer of their ersatz expertise, I like to say these people know just enough to be dangerous.1 What do I mean?
Continue reading “Knowing Just Enough to Be Dangerous”
Hello world! I’m Scott Rosenbaum, a 35-year old, wine and spirits importer/distributor who lives in Jersey City. I am very unqualified to write about personal finance and investing, but here we are. I invite you to join me as I teach myself as much as I can fathom useful. The ideas I write about should not be misconstrued as advice, but rather food for thought for the thoughtful.
With any luck, my self-education can be of service to you as there should be something here for everyone. For those just starting to explore the world of personal finance and investing, I’ll do my best to introduce the concepts of behavioral economics (aka the science of decision-making), recommend books, and regale you with stories of purchasing life insurance and writing one’s will.1 If you’re a seasoned wealth management professional, I offer you the chance to see “how the other half lives.” How do retail investors think about asset allocation, diversification, risk and lot of it? Can I explain to my father what an inverted yield curve means for the general economy? Or better yet, his investments? Stay tuned to find out, as I don’t yet know what an inverted yield curve is.
So what can you expect from Education of An Investor?
Continue reading “Welcome to Education of an Investor”