Two Quants and a Financial Planner | Bridging the Worlds of Investing and Financial Planning

What You Need to Know About Analyzing Backtests

Jun 17, 2024

01:01:15

In this episode of the podcast, we dive into the world of backtesting investment strategies. We discuss the importance of approaching backtests with a healthy dose of skepticism, as it's easy to create a backtest that looks impressive but may not hold up in the real world. We explore various questions to ask when evaluating a backtest, such as whether it accounts for human emotions, has a sound economic reasoning behind it, covers a sufficiently long time period, and includes periods of struggle. We also touch on the potential pitfalls of data mining and the challenges of creating a truly "pure" bet without unintended exposures. Throughout the conversation, we emphasize the need to understand the limitations of backtesting and to use it as a tool for learning rather than a definitive guide to future performance.

We hope you enjoy the discussion.

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