{"id":537882,"date":"2010-04-21T13:28:52","date_gmt":"2010-04-21T17:28:52","guid":{"rendered":"http:\/\/www.businessinsider.com\/back-testing-etfs-to-improve-your-odds-2010-4"},"modified":"2010-04-21T13:28:52","modified_gmt":"2010-04-21T17:28:52","slug":"a-quick-lesson-in-back-testing-etfs-to-improve-your-odds","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/537882","title":{"rendered":"A Quick Lesson In Back-Testing ETFs To Improve Your Odds"},"content":{"rendered":"

(This is a guest post from FXIS Market Insights<\/a>.)<\/em><\/p>\n

The naughties (00’s) are often referred to as the lost decade culminating in the financial tsunami of 2008\/09.  Total returns (including all dividends) on the S&P 500 were about –9% (-22% in nominal terms) for the entire decade.  With those numbers, it has become difficult to find a rationale for the “Buy and Hold” strategy that has been indoctrinated to the average investor for decades.<\/p>\n

But despite the poor performance of stock markets over the past decade, there is ample evidence suggesting that stock picking and other active investing strategies are bound to run into substantial headwind over a longer period of time.  As Tom Lydon of www.etftrends.com<\/a> suggests in his post: How to Become a Better ETF Trader<\/a>:<\/p>\n

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According to a recent TrimTabs study, ETF investors are so bad at picking the right time to buy or short-sell the equity markets that those doing exactly the opposite of what ETF players did in the past 10 years would have ended up making sevenfold profits, reports Oliver Ludwig for Index Universe. <\/span><\/p>\n<\/blockquote>\n

The likelihood that a similar scenario would apply to most other active trading strategies in general is high and the rationale for that is quite simple: With more frequent transactions, trading approaches the realm of a zero sum game and the probability of outwitting other investors is by definition 50\/50 minus transaction costs.  Unless you are an above average investor (trader), you won’t beat the crowd.  Although this may seem an oversimplification in terms of stock trading, an active investment strategy should on average under-perform the market by the amount of transaction costs incurred. <\/p>\n

So we have established that “Buy and Hold” didn’t work in the past decade and that market timing is also a particularly challenging task.   How can one improve the odds and what is the right strategy?<\/p>\n

Tom Lydon suggests a few simple rules:<\/p>\n