Imagine you make the worst decision of your life, you don’t wear shoes while driving. The dogs are out, and you get pulled over, then the police officer gives you a ticket because you aren’t wearing shoes. Don’t you wish you had the hindsight to go back in time and wear your freaking shoes?
Everybody wants to travel back in time, and nobody wants to deal with the consequences of their present-time actions. That is why backtesting is a game-changer in financial investing!
Backtesting is an artificial test of a stock screener using past data from companies to test your strategy using real examples. If you want to find companies with certain properties that make them grow and see a trend? Backtest it. If you want to find companies using the momentum hypothesis? Backtest it.
The value in backtesting becomes boldly obvious when you test that formula hiding in the back of your head, realize it isn’t as great as you thought, and then it evolves into a better thought to apply to the stock market. Backtesting is the avenue to make that happen.
Shocker! Buying and Holding a Stock is NOT a Good Test Strategy
The “Buy and Hold” strategy is when you buy stocks and hold them for extended periods of time with the belief that the long-term investment will grow in return rate.
The “Buy and Hold” strategy to figure out if stocks are worth investing in is like when old people say, “Don’t ever use a credit card. It’s a bad idea.” They’re both bad advice. If you never use a credit card, you will never build credit. If you always buy and hold stocks, you’ll always receive the consequences when the stocks perform poorly.
Here are three reasons it’s advised to ignore the “Buy and Hold” strategy:
- Risk: Not all stocks perform well with time; the risk with this strategy is you might miss the opportunity to sell the stock before it performs poorly and hurts you because you’re simply testing it out with all the consequences.
- No Adaptability: This strategy will not allow you to evolve with the market disruptions or performance in the most efficient way. It assumes a stock will have a positive return, but it could end the opposite.
- Lack of Management: This strategy does not encourage active management, which could backfire with declining stocks, market disruptions, or missed opportunities to capitalize off the stock.
How Does Equities Lab Help?
Equities Lab provides the software for unlimited backtests, so you’re not stuck with a strategy that can hurt you in the long run! What does that mean for you? If you’ve got a strategy, a formula, or a thought in your head of what makes up a successful stock, but there is a hint of doubt or uncertainty, backtest it and find out. Maybe it isn’t as perfect as you imagined, what do you do? Improve it. Next? Backtest it!
Your first strategy looks like the image below. You’ve created a formula that doesn’t outperform the S&P 500, but it does alright. You want better. You decide to improve your strategy.
The image below is your second strategy that is SIGNIFICANTLY stronger and performs immaculately in comparison to the S&P 500. How did you figure that out? Backtesting.
The great part about backtesting is you can continue to improve the simulation, so you’re only getting better results, all through Equities Lab.
Why You’re Going to Win
Imagine that bad decision you could’ve made but didn’t because you saw the future. That is exactly how you’re going to win the finance game. With the embodiment of Equities Lab’s motto, “Better living through backtesting,” you can avoid the consequences of poorly performing stocks by knowing ahead of time what will perform well.
Don’t wait to win; get involved in investing today by keeping up with the next article about how Equities Lab avoids certain biases in backtesting and encourages backtesting strategies that avoid the “Buy and Hold” method. Feel free to contact firstname.lastname@example.org or visit our website to start accessing the software today.