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Back-Testing
Most of the portfolio returns that we quote
on our site are from real-time investing. With a few of our
portfolios, we test the stock-picking strategy of the portfolio
in the past to see how it would have performed had we been
using the strategy in real-time. For example, we have back-tested
our Short-Term Portfolio back to 2001 and found that its back-tested
returns were 54.7%
per year. Our back-testing software utilizes an "end-of-day"
database. This means stock returns are calculated on the stock's
closing price. For instance, let's assume a minimum holding
period of one week is used. The database assumes that the
"buy" price is made at the close of Friday. The
database, which screens stocks for our Short-Term Portfolio
as well as back-tests our Short-Term Portfolio strategy, isn't
updated by our data-provider until after Friday's market close,
so an investor following the strategy would be able to buy
the stock at the opening price on Monday at the earliest.
Therefore, if the stock's price changes between the close
of Friday and the opening price on Monday, the back-testing
doesn't reflect the change. In other words, real-time investing
results may be higher or lower than the results indicated
from back-testing, depending on the stock's price change (if
any) from the close of Friday and the actual price the investor
obtains.
In addition to any back-tested returns (which
are only given for a few of our portfolios), we also
provide real-time trading results for all of our portfolios.
These are calculated based on the stock's price on the day
of the buy-signal issuance. This is a slightly more realistic
calculation of performance. Furthermore, due to the high trading
activity of the Short-Term Portfolio, our real-time trading
results include the cost of trading commissions.
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