Here is sample worksheet that explains how different parameters on result page is being calculated
What is Forwardcaster?
Forwardcaster is an Investment Strategy Builder. We help investors build and test their own long-term investment strategies. Investors can track preferred strategies forward by linking them to a Portfolio Tracker which delivers results each day, week, or month.
Additionally, back-testing by decile means that investors can see whether or not their favourite ratios help to drive investment performance. This helps long-term investors build robust investment strategies and allows for more discipline and objectivity in the investment decision-making process.
Why is this important?
The performance of the investor’s portfolio is more important than the performance of its individual investments. However, without the right tools, it is easy for investors to concentrate on individual wins and losses and lose sight of their overall strategy.
This is especially true for retail investors. They typically don’t have access to the portfolio and risk management tools that institutions use. And so, they invest in a collection of individual investments without a coherent investment strategy or risk management framework. Retail investors, in particular, tend to buy the hot story stocks which inherently come with poor risk/return prospects, and sell after they become disillusioned with their returns.
Forwardcaster’s back-testing engine cuts right through all of that. After running a few strategies, it quickly becomes clear that investing in the hot story stocks is a losing proposition over the long-term. It also allows an investor to create outperforming strategies by sorting through thousands of stocks on a monthly basis over many years based on a range of value-based criteria.
How does it work?
Forwardcaster’s back-testing engine buys and sells companies based on your strategy’s criteria and portfolio settings. It runs through the history of the stock market looking for companies to buy or sell according to your investment criteria.
A typical back-test takes less than three second and analyses over 30 million data points over more than 15 years of market history. As Forwardcaster uses a point-in-time database, companies which were merged, acquired or went bankrupt are included. This helps to ensure that your investment strategies are robust and built for the future.
Forwardcaster helps you to answer these questions:
- What’s a best-case scenario? What’s a worst-case scenario?
- Which valuation multiple has a tendency to outperform? Do any?
- Should I consider companies with strong price momentum?
- How often should I rebalance my portfolio?
- How do I manage portfolio risk?
- What’s the level of volatility I can expect with a 10-stock portfolio versus a 50-stock portfolio?
- Should I diversify my holdings across industries?
For a free trial sign up here
Who is Forwardcaster for?
To get the most out of Forwardcaster, you need a reasonable understanding of finance. Can you answer this question?
What is ‘the market’ telling you about a company with low earnings multiples?
If you know there’s more than one way to answer this question, that’s great! Sign up and give Forwardcaster a go today.
If not, we suggest you sign-up and share your investment strategies with your Financial Adviser.
You can work together by discussing the strategies you build with the purpose to create a robust equities portfolio tested on the past but built for the future.
How do I sign up?
Follow this link to Sign up
What plan should I choose?
This depends on how many Custom Strategies you think you are going to use. Start off by signing up to a free account and then upgrade your plan as you require.
What’s the easiest way to get started?
Run the tour to get the most out of Forwardcaster.
1) Turn on the Tour by selecting the Tour? switch. Forwardcaster will then explain how to use the page you are on:
2) Click “Next” to follow the Tour. Click “End Tour” to end:
Why is a strategy important?
Investing success involves good risk management and strong discipline. That is basically it. It sounds easy but it is not. This is summed up nicely by Howard Marks of Oak Tree Capital:
“To be a successful investor, you have to have a philosophy and process you believe in and can stick to, even under pressure. Since no approach will allow you to profit from all types of opportunities or in all environments, you have to be willing to not participate in everything that goes up, only the things that fit your approach. To be a disciplined investor, you have to be able to stand by and watch as other people make money in things you passed on.”
A back-testing engine allows you to develop a strategy which suits you. By running a back-test over many years, using stock selection criteria of your choice, you will immediately see how poorly your strategy did in 2008 to 2009. You can isolate that period and run the strategy again. This will give you some indication of downside risk.
You can test how to reduce risk. For example, you may wish to reduce the impact of industry concentration by placing a restriction of say less than 15% of your portfolio in any one industry. In addition, you can see what your strategy looks like with a high level of diversification (e.g. by investing only 1% of your portfolio in any one investment) then you can see what happens to your portfolio with a low level of diversification (e.g. by investing 7 or 8% of your portfolio in any one investment). Just by doing this, you will see large differences in risk and return generated from the same strategy.
By running a variety of scenarios, you will be able to build up a picture of how your portfolio is likely to behave in the real world. This will give you some idea of expected risk and return and will allow you to select investments with more discipline, and be more comfortable with the volatility of individual stocks in your portfolio: you’ll see them as part of the bigger picture.
It is important to remain sceptical of the results of any back-test. It if looks too good to be true it probably is. You may have created a strategy which by chance did extraordinarily well by the amazing performance of only one stock. You should export the trade results of your strategy and check the performance of all of your trades. If one or two investments explain most of your good performance, you should not rely on this as a strategy going forward, as it is unlikely you’ll find the same outperforming stocks in the future.
In addition, it is important to create simple strategies not complex ones. The more complex the strategy the higher the risk you run of fitting your strategy to historic data rather than building a strategy robust enough to handle the future. The best strategies are simple, and grounded in an economic reality that you can explain to someone in one sentence (e.g. I buy a diversified portfolio of low leveraged undervalued companies).
To learn more about the eight pre-defined ‘guru’ strategies we have already built. Click here
What kind of database do you use?
We use Capital IQ’s global point-in-time fundamentals database. This is a high quality database used by institutions worldwide. A point-in-time database contains both listed and delisted stocks and the data is reported at that point-in-time (i.e. it is not restated at later date). A point-in-time database mitigates survivorship bias.
In addition, we use ‘as-reported’ data in order to avoid look-ahead bias. ‘As-reported’ data comes from the financial statement which was first released to the public by the company. Companies often restate their financial reports at a later date. We only use as reported data, and are currently using annual fundamentals with end-of-month stock prices.
Click here to find out more on the database we use.
How do you mitigate the risk of curve fitting?
The more you refine your strategy, the greater the chances you have of fitting your strategy to our historic database. This is unlikely to be of any predictive value. Therefore, in order to mitigate this risk, we suggest the following:
- create strategies which have an underlying economic rationale
- create simple strategies (the more detailed you get, the more likely it is that you’re fitting your strategy to history rather than creating successful investment rules for the future)
- test over different time periods and consider the economic conditions of those periods
- test in different markets (a global database point-in-time database is coming soon)
Does it account for slippage and brokerage fees?
Yes, is does. We calculate slippage as the percentage of the quoted price. The value you set will depend on the strategy you are running. Our default slippage cost is set to 0.5%. We’ve based this amount on this work here which is a long-term study of frictional investing costs (Jones, May 2002). If you are looking at running a small-cap strategy your strategy should assume a higher slippage value of up to 2%.
There’s a large difference between what professionals and retail investors pay in brokerage. The default brokerage fee is set on the conservative side for retail investors at $10 per trade.
How many custom strategies do I have?
Once you’ve logged in, go to Account and click on Usage. You’ll see the strategies you’ve run and the number you have remaining for the month.
Early every morning New Zealand time (between 4:30am-5:30am) Forwardcaster downloads market data from every listed market worldwide.
Forwardcaster uses Capital IQ’s global point-in-time fundamental database, which updates all stock market data that has happened during that business day. This ensures Forwardcaster is up and running for analysis at the start of New Zealand’s business day with the most recent end of day data available. During this time Forwardcaster will be unavailable.
In due course this maintenance down-time will be unnoticeable, but please bear with us for the moment.
Forwardcaster apologises for the inconvenience.
What can I expect to happen if the dates between portfolio tracking and rebalancing are out of sync?
The rebalance frequency is set by the strategy rather than the portfolio tracking date. On the rebalance date, our engine sells down the stocks in your model portfolio and then looks at your strategy’s criteria and portfolio settings in order to buy stocks back again.
This action completely rebalances your portfolio back to your original portfolio settings. Therefore, when tracking a portfolio, you can expect to see sell signals for all stocks and then simultaneous buy signals. This action will occur on the date of your portfolio tracker.
If the dates do not match between the portfolio tracker and engine, this rebalancing process will occur few days late (based on your tracking frequency). As some of the stocks will likely be the same, in practice it makes sense to manually rebalance your portfolio. This would avoid unnecessary transaction costs.
How do I get the most out of decile ranking?
When you create a strategy, the ranked order is the direction our engine will select stocks from. If you have selected the order to be descending the most important deciles are – 10, 9, 8.
If you’ve selected ascending order, the most important deciles are 1, 2, 3.
These are the stocks our engine will prioritise when use the ranking functionality for a strategy you are testing.
I get different decile results when I change the order. How come?
We use a portfolio-approach to decile ranking. This approach buys a basket of 50 stocks in each decile and tracks their performance over time and rebalances it on the rebalance date chosen.
For example, if we have a universe of 3000 stocks. There will be 10 deciles of 300 stocks in each decile. If the user ranks the market in descending order, the engine will buy the top 50 stocks in each decile. On the other hand, if the user ranks the market in ascending order, it will buy the bottom 50 stocks of each decile. As the portfolio of stocks are different, the results for each decile will be different. The difference in results is caused by the ranked order you’ve selected – ascending or descending.
How to track a strategy
1) Go to the Portfolio page:
2) Click ‘+Portfolio’. This takes you to the Portfolio Edit page. Note: The greyed-out boxes cannot be changed:
3) Change the name of your portfolio by clicking on the pencil icon next to ‘Name Portfolio’. Enter in your portfolio name and click ‘Change’:
5) Enter your portfolio value, in this case $25,000. This value determines the size of each position based on the portfolio settings of your strategy. If the position size of the strategy is 4% then each investment will be starting with a value of $1,000:
6) This portfolio has $5,000 in cash to invest. The engine will deploy this amount according to your strategy’s criteria and portfolio settings:
7) Link a strategy by clicking on the arrow in the ‘Link Strategy’ dropdown (note: you must create a strategy before you can link it). ‘Dividend Value-CopyNZ’ has been selected here. Choose the frequency you want the engine to assess the market, with the ‘Track frequency’ settings. The options are to run the strategy each day, week, month or year looking for the companies which fit your criteria:
8) Finally, click ‘Save & Run’ to generate your results:
How to create a buy condition
1) Go to the Edit page (this is the top of the edit page)
2) Select Add by clicking the pencil in the icon
3) This buy condition pop-up will appear
4) Click on Value1 (the orange box). The pop-up with a range of data items below will appear
5) Choose the data item you want. In this case we have selected the price to sales ratio from the Multiples category
6) Click on the data item (i.e. price to sales). Then select your option to assess this metric against from Criteria. See the screen shot below. It can either be Value, a 3-year average, or a 3-year growth rate
7) See the example below. The user has chosen price to sales with Criteria being ‘value’. The Criteria selected determines the input you will choose in Value2.
8) The operator allows the user to choose how the metric is assessed against Value2. In this case “Less than”
9) Value2 is the buy condition that you are setting for the metric you have chosen in Value1
10) As the user has chosen a criteria of “value” and has entered the number “2”. This buy condition will simply look to buy any company with a price to sales ratio of less than 2 at that point in time
11) The final step is to choose either AND which can include other buy conditions, or OR which will look to buy companies with another buy condition
12) In this example the user has chosen OR:
13) The expression below is Buy companies with a price to sales ratio of less than 2 Or:
14) Buy companies with a EV to EBITDA ratio of less than or equal to 10:
That’s how you create a buy condition.
To create a sell condition, the process is the same. For example, you may decide to sell any company you hold if it is above 8 on a price to sales basis.
What does the Universe section do? How do I use it?
The Universe section of the Strategy Edit page helps you define the universe of stocks your strategy assesses. You can choose the market, exchanges, currency and benchmark. You can also rank the market according to your preferred metrics:
Ranking the Universe
Ranking the universe of stocks is one of the most important aspects of the back-testing engine. Ranking allows an investor to prioritise certain stocks which will then be selected by the ‘buy’ criteria below.
For example, if you rank the Universe by market cap in descending order, your strategy starts at the top (i.e. the largest companies) and works its way down looking for companies to buy according to your buy condition. This feature allows you to prioritise the type of company your strategy selects.
1) To rank the universe, click on the Rank Universe (1) pencil icon.
2) The ‘Universe’ dialogue box appears:
3) Click on the N.A. button:
4) The ‘Single Select’ dialogue box appears:
5) Select the + button and choose the financial metric you want, in this case ‘Yearly Price Change’:
6) Note the ‘Descending’ radio button selected below; the engine will start with the companies with the highest yearly price change over the previous year and work down to the poorest performing company looking for companies to buy which fit your ‘buy’ condition:
7) To rank another variable, choose Rank Universe (2) and repeat the process as above:
8) Note that Market Value ‘Descending’ is a second metric. To combine the two ranked values select ‘Combine Rankings’. This feature ranks the Universe based on the combined ranked value of the two metrics you have selected. Below, you can see the two ranked metrics are Yearly Price Change and Market Value in descending order. The engine will place the largest companies with the greatest Yearly Price Change at the top and rank the Universe of stocks based on those two combined values in descending order. It will work down this list looking for companies to buy based on the buy conditions you have entered in the buy criteria.
9) The ‘Universe’ dialogue box appears. Select the orange button and choose YES:
10) In the example below the user has ranked their universe so their strategy prioritises large companies with strong price momentum over the preceeding year:
How to adjust the level of diversification of your strategy
You can adjust your strategy’s diversification in the Portfolio section of the Strategy Edit page.
There are two methods to diversify your strategy:
- Position Size (%) changes the total number of stocks your strategy can hold.
- Allocation per Industry (max. %) limits the number of stocks you can hold in any industry up to a maximum percentage value of your portfolio size.
A quick way to decide on the Position Size you want is to consider how many stocks you want in your portfolio at any one time.
For example, if you want a 25-stock portfolio, divide 100 by 25 to get the position size (i.e. 4%). If you want a 50-stock portfolio, divide 100 by 50 and get a position size of 2%, and so on.
1) To change the number of stocks your strategy can hold, go to Position Size (%) and click on the pencil icon:
2) Enter the value you want from the ‘Portfolio’ dialogue box, in this case ‘2’ and select OK. 2% represents 50 stocks:
3) Review the Position Size (%), in this case 2% has been entered as the Position Size:
Diversify by Industry
To diversify your strategy by industry, click on the pencil icon:
1) Review the ‘Portfolio’ dialogue:
2) Enter the value you want, in this case ’20’ (note: the value is a percentage of your portfolio size):
3) Finally review your selection of 20%; This ensures that no more than 20% of your portfolio can be allocated to one industry:
How do I rebalance my portfolio?
You can rebalance your portfolio in two ways:
Navigate to the Trade and Rebalance options in the Strategy Edit page:
1) To rebalance your portfolio periodically, enter the number of ‘Sell After Days’ you want. Below, you can see that 365 has been entered. This rule will automatically sell all your positions after 365 days. On the following day it will re-buy stocks according to your buy criteria and your portfolio will be rebalanced according to the Position Size you’ve chosen in the portfolio settings section:
2) If you wish to only sell companies you have lost money on, tick the Only sell losers’ box:
3) You can prevent your strategy from re-buying the stocks you previously held by entering the number of days you wish the engine to dismiss those stocks for:
To rebalance your portfolio continuously, choose the method you would like to use from these options or any combination:
- Buy more if price falls
- Stop loss on drop of
- Sell on rise of
These three options allow you to control how you’d like to manage the stocks in your portfolio.
You can use the “buy more if price falls” function to average up or average down on any particular stock.
To average up (i.e. buy more) enter the price decline value you would like the ‘buy more’ trigger to action. For example, if you enter 25%, the engine will buy another allocation of shares of the companies’ in your portfolio if they fall by 25%. This allows you to build up a larger position as the stock price declines.
Note: you can also enter a negative number, which will average down as the price rises.
If you select the Check original criteria box as below, the engine will check to see if that particular company still meets the original buy criteria you have set.
To limit the number of times this rule can be conducted on any one stock, enter a value in ‘Max’ box. You can see the number ‘3’ has been entered below. This means the engine can only trigger three ‘buy more’ actions for any particular stock.
To sell companies which have declined in price, enter your stop loss value by selecting the check box and entering a percentage value.
Below you can see 30 has been entered. This will sell the position if the stock declines in value by 30% or more. If the Trailing box is selected, the stop loss will trigger based on the previous periods price value rather than the current periods.
You can also prevent the engine from re-buying that stock for a specified number of days by entering the number of days you don’t want the engine to buy that stock for:
To ensure that your portfolio doesn’t become overly concentrated in a few hot performing stocks, you may wish to enter a ‘Sell on rise of’ value. In this example a value of 300% has been entered. This will sell any position which has risen by 300% or more:
If you wish to keep an allocation in your portfolio of those good performing stocks, you can enter the percentage amount you’d like the engine to sell (and the remainder to keep).
For example, the engine will sell 80% of any position which has risen by 300% or more. It will keep the remaining 20% in your portfolio:
How do I back-test the market by decile?
If you are a Builder Plus member, you’ll see the Rank by Decile option on the Strategy’s Edit page. The default setting is Off.
1) Turn it on by clicking the pencil icon and changing the OFF selector to ON:
Once selected, some of the criteria in the Universe section changes. In particular, the Rank Universe (1) and (2) controllers are used to select the metrics to back-test by decile.
2) To back-test by decile, select a metric you want by clicking on the Rank Universe (1) pencil icon. Observer the ‘Universe’ dialogue:
Select Ascending or Descending to order your Rank Metric. This determines which way the market is split into deciles during the back-test. If it is Descending, Decile 1’s will be at the top and Decile 10 will be at the bottom. If it is Ascending, Decile 1’s will be the low values (i.e. the bottom) and Decile 10s the high values (at the top of the ranking).
3) Click on the (N/A ) box to choose your metric from the ‘Single Select’ dialogue:
4) Choose your metric from this list by clicking on the plus button and then the metric. Below you can see we have chosen ‘General – Market Value (In Millions)’ in Descending order. This will back-test the market by company size. As we’ve chosen Descending order, the largest companies will be in Decile 1 while the smallest companies will be in Decile 10. Click OK to save.
If you want to back-test deciles using combined metrics, do the same process as above using Rank Universe (2) then select ‘Yes’ for Combine Rankings:
Above, you can see that we have selected the Australian market and the ‘Rank by Decile’ function is On. We have chosen two metrics to back-test by decile and are combining those metrics. The result will be to split the market into 10 equal parts with the largest companies with the greatest yearly price change in the 1st Decile and the smallest companies with the lowest yearly price change in the 10th decile. To see the results save that strategy and select RUN.
You can adjust the ‘Rebalance’ frequency. After the rebalance elapsed time all the stocks in each decile are sold, the engine then re-ranks all the stocks and buys them back again according to the ranked variables. The default rebalance frequency is set to Annual. You can change this by clicking on the icon. You can choose to rebalance each decile either; Quarterly, Semi-annual, Annual, 2-years, 3-years, or 5-years.
How do I share a strategy?
1) Click on the person icon ‘share with’ in the Strategy Result page:
2) The ‘Email Address’ dialogue appears:
3) Enter an email address and then press the Tab key to enter another email address:
4) Add any comment and then click ‘Share’.
If the person is not a Forwardcaster member, they will be sent an invitation to join. If they are a member they will be notified and the shared strategy will be available to view on their Strategy List page.