I recently had the pleasure of meeting some new people over happy hour at a local meetup group. Between a few drinks on the patio on a warm early-fall afternoon, we exchanged the typical “so what do you do?” icebreakers, shared some fun stories, and had a great time.
As the introductions turned to me, I guess it’s no surprise that the topic of investing came up. I talked a little about the website I run that studies historical data to help people make wise investing decisions without having to stress about keeping up with the markets. No big deal, but I’m pretty proud of it.
I was sitting next to a smart and accomplished guy who knew a bit about investing, and his natural reaction was a perfect mix of genuine, engaged, and polite. It went something like this: “That’s really cool. But as they say, past performance is not indicative of future returns. It’s too bad that historical data not very useful for decisions today.”
Honestly, his comment didn’t surprise me at all. Not only have I heard that from plenty of investors before, but I’ve also seen the same standard disclaimer on hundreds if not thousands of investing resources over the years.
Past performance is not indicative of future results.
This straightforward statement has become so ubiquitous that many investors simply take it for granted without giving it much thought. And as a result, many intelligent people normally predisposed to evidence-based thinking in other aspects of life nonetheless dismiss the field of portfolio backtesting altogether.
But here’s the thing. That throwaway sentence is often just flat wrong.
So for my new friend asking about my investing hobby and all of my old ones here wondering how to properly apply historical data to today’s choices, let’s talk about the limits — and power — of effective portfolio backtesting.
