Backtesting and Overfitting Your Investments

Investment.jpgIn The News

If your investment counselor calls with a recommendation for a new portfolio based on whether that same portfolio would have yielded positive results if you had begun investing 20 years ago, should you consider the possibility?

Mathematicians say no.

In research published in Notices of the American Mathematical Society, researchers found that this process of backtesting often used a larger set of investment potential variables than should be considered. The authors wrote, "Recent computational advances allow investment managers to methodically search through thousands or even millions of potential options for a profitable investment strategy. In many instances, that search involves a pseudo-mathematical argument which is spuriously validated through a backtest."



Daily Health Tip

In the case of evaluating potential investments, more is not necessarily better. In fact in comparing these potential portfolios, one will always outperform the others using that particular dataset. But, when comparisons are made to other samples outside the portfolio considerations, even the portfolio which appeared to outperform all others, will potentially fall flat.

Having an investment counselor or broker can be both an advantage and disadvantage. On the one hand you can get educated advice about your investment strategies. But, on the other hand, you should never put your money in someone else’s hands. Whether your investment grow or fail is ultimately up to you. Although they can advise, they won’t be taking the hit or enjoying the wealth.

It’s your money and you need to know what to do with it.


Making Changes

Although it can be overwhelming to delve into investment portfolios, financial currency and what appears to be a totally different language, it is important that you become familiar with how you invest your money. Do NOT make the mistake of believing your mattress holds the key to your future. While hiding your money under the proverbial mattress doesn’t have to happen under a real mattress, a fireproof box, safety deposit box and savings account in the bank are all just modern day mattresses.

Start by branching out to learning about money market accounts. These are relatively easy to understand and managed by an individual or company. Money market accounts have a higher rate of interest on your investment than a savings account or certificate of deposit, but doesn’t have the risk value of investing in the stock market.

The trick to investments is to start somewhere. You don’t have to have a lot of money, but you do need money. You don’t have to have a lot of knowledge, but you do need the desire to learn something. You don’t have to have a lot in savings, but you do need to plan for retirement.

The time to start is today and the person responsible is you. Don’t rely just on the advice of others. It’s time to take one small step toward a future you create.


Have a wonderful day!

Your Healthy Life America Team



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