Portfolio123’s backtesting and simulation capabilities are its most popular, and for many users, the primary reason to subscribe. The benefit of having some advance sense of whether one’s strategy has the potential to succeed is enormous. We’ve al had experiences with ideas that sound great on paper but fall short in the real world, so it would be nice if we could get a sense of how we may fare in the latter before we take the plunge with real money.
But backtesting and simulation cannot be treated as an easy silver bullet. Such tools necessarily rely on the data gathered from the past, which is all we have. However, the success or lack of success of our investing endeavors are determined by what happens in the future. This would pose no problem if we could be certain, or even comfortable in assuming, that the future will resemble the past. Unfortunately, that is often not the case.
Therefore, its important that we take care to avoid approaching backtesting and simulation in a naive manner. To make it work for us, we need to approach it strategically, based on what we can learn from historical testing and how we should go about learning it.
The following Presentation was prepared on this topic and posted on the Portfolio123 Forum. You can click here for access to that presentation: P123 Strategy Design Supplement 5 – Effective Testing:Simulation on Portfolio123