Explore Finestor: Test Long-Term Investment Strategies

Finestor grants investors the opportunity to explore a wide array of investment options, including nearly 6,000 stocks and around 3,000 ETFs.

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LIDERBOT

3/7/20247 min read

finestor
finestor

Today, we will dive into an insightful exploration of the process of creating your own investment strategy using Finestor's free, intuitive backtesting tool. Let’s start our exciting journey straight away!

Quick tool overview

Finestor grants investors the opportunity to explore a wide array of investment options, including nearly 6,000 stocks and around 3,000 ETFs. This tool is enriched with fundamental data stretching back to 2009, allowing users to craft and refine their investment portfolios with precision before they decide to make any financial decisions.


finestor
finestor

How to Get Started


Step 1: Select Your Starting Year

  • Initiate Testing: Begin by selecting the year from which you want the backtest to start. This allows the platform to automatically tailor the available data, ensuring that the stock table accurately reflects the chosen year's market conditions.

Step 2: Define Your Investment Criteria

  • Strategize: With your start year set, it’s time to delineate your investment strategy. For example, you might opt to focus on securities within a specific sector—such as medical care—that boast high market capitalizations but low price-to-earnings (PE) ratios. This approach can help identify fundamentally strong companies potentially undervalued by the market.

In our scenario, we focus on selecting high market cap stocks within the healthcare sector, emphasizing those with low PE ratios, low price-to-book values, and high EBITDA margins.


finestor
finestor

Step 3: Customize Your Portfolio

  • Portfolio Customization: Click the “Show Stocks” button to review and modify your current portfolio selections. This functionality enables you to remove specific stocks, fine-tune allocation percentages, and obtain a comprehensive view of your entire portfolio. You can choose up to 100 stocks in a single portfolio.

Step 4: Calculate Your Results

After selecting your preferred stocks and adjusting their allocation weights within your portfolio, proceed to the next crucial step by clicking on the "Calculate" button. This action triggers the system to process your selections and present you with a detailed results page.

Key Features on the Results Page:

  • Portfolio Refinement: The results page offers you another opportunity to fine-tune your portfolio. You can make further adjustments, such as adding or removing stocks, to optimize your investment strategy based on the insights gained.

  • Visualization with Pie Chart: Gain a visual understanding of your portfolio's composition through a pie chart displaying the weight of each stock. This graphical representation helps in quickly identifying which stocks dominate your portfolio and ensuring your investment is aligned with your diversification strategy.

  • Comparative Performance Chart: One of the most insightful features is the performance chart that compares your portfolio's results against a benchmark. By default, the comparison is made with the S&P 500, providing a clear picture of how your selected stocks stack up against this widely recognized market index.

If you wish to compare your portfolio's performance against other benchmarks, the option to change is readily available. Simply click on "Search For More Stocks" to return to the stock tables, where you can select a different benchmark for comparison, such as the Dow Jones Industrial Average or the NASDAQ Composite. This flexibility allows you to evaluate your portfolio's performance from various perspectives, ensuring a comprehensive analysis.

finestor
finestor

Step 5: Analysis

After calculating your results, the next pivotal step involves a deep dive into analysis and subsequent adjustment of your strategy based on the insights garnered.


As you can see our initial strategy managed to slightly outperform the S&P 500 benchmark—a positive outcome, yet there's room for improvement towards ideal returns.


Let’s click “Indicators Tab” and analyze our portfolio metrics:

Arithmetic Average (Monthly and Annualized)

  • Monthly: 5.18%. This high monthly return suggests strong performance, significantly above average for most investment categories.

  • Annualized: 27%. An annualized return of 27% is exceptional, indicating a very high level of performance over the year.

Geometric Average (Monthly and Annualized)

  • Monthly: 4.70%. This indicates the compounded rate of return per month, showing robust growth.

  • Annualized: 25%. Similar to the arithmetic average but accounts for compounding, signifying excellent performance.

Standard Deviation (Monthly and Annualized)

  • Monthly: 9.88%. This high volatility indicates a wide variation in monthly returns, suggesting higher risk.

  • Annualized: 25.50%. High annual volatility further indicates significant risk in the portfolio's returns.

Downside Deviation (Monthly)

  • Monthly: 4.68%. This measures the volatility of negative returns. A moderate figure suggests that while there is risk, it's somewhat contained.

Maximum Drawdown

  • Maximum Drawdown: 29.97%. This is a high figure, indicating the portfolio experienced a significant drop at its worst point, which could be a red flag for risk-averse investors.

Beta

  • Beta: 0.57. This suggests the portfolio is less volatile than the benchmark (S&P 500). It indicates lower market risk but still responds to market movements.

Alpha (Annualized)

  • Alpha: 137%. A high alpha indicates the portfolio outperformed S&P500 by a wide margin.

Sharpe Ratio

  • Sharpe Ratio: 0.99. This is close to 1, indicating that the portfolio's excess return justifies its risk. It's generally seen as acceptable but not outstanding.

Sortino Ratio (Monthly)

  • Sortino Ratio: 1.07. This focuses on downside risk and suggests the portfolio has earned sufficient return over its downside volatility, indicating good risk-adjusted performance.

Treynor Ratio

  • Treynor Ratio: 0.44%. This is relatively low, suggesting that the portfolio's risk-adjusted return (accounting for market risk) is moderate.

Calmar Ratio

  • Calmar Ratio: 0.82. This ratio compares the annualized return to the maximum drawdown, indicating that returns somewhat compensate for the risk of large drops but could be better.

Profit and Loss Ratios

  • Profit Ratio (%): Indicates the percentage of trades that are profitable,

  • Loss Ratio (%): Shows the percentage of trades that resulted in a loss,

Positive Periods

  • Positive Periods: 85 out of 132 (0.64). This indicates that around 64% of the periods were positive, which is a solid figure showing more winning periods than losing ones.

Gain to Loss Ratio

  • This ratio compares the average gain of the profitable periods against the average loss of the unprofitable ones. Gain to Loss Ratio: 0.97. This ratio is close to 1, indicating a balance between gains and losses. In an ideal scenario, you'd want this number to be higher, indicating more gains compared to losses.


For detailed insights into individual stock performance within your portfolio, utilize the "Attribution" tab:


Step 6: Adjustment

But let’s try a different strategy to find out if we can improve our portfolio. We'll pivot towards investing in high market capitalization stocks that exhibit a Price-to-Earnings (P/E) ratio under 15 and an EBITDA margin over 0.3.


finestor
finestor

As you can see we once again managed to outperform SP500 benchmark with exceptional results.

This strategic shift resulted in a more favorable risk-reward balance, as indicated by the updated metrics in the "Indicators" tab, suggesting a superior investment approach.

Comparative Analysis of Indicator Metrics

When comparing the updated strategy metrics to those of the previous approach, we see marked improvements across various indicators, illustrating the enhanced performance and reduced risk profile of the portfolio:

  • Arithmetic and Geometric Averages: The increase in both monthly and annualized returns points to stronger performance and growth potential of the revised strategy.

  • Standard Deviation: A decrease in monthly and annualized volatility indicates a reduction in the overall risk of the portfolio.

  • Downside Deviation and Maximum Drawdown: Lower values suggest that negative fluctuations are more contained, and the worst-case scenario loss has decreased, improving the risk tolerance of the strategy.

  • Beta: A slight increase in beta implies a bit more sensitivity to market movements, yet the strategy remains less volatile than the market.

  • Alpha: The remarkable jump in alpha indicates a significant outperformance relative to the benchmark, highlighting the effectiveness of the strategy.Sharpe and Sortino Ratios: Improvements in these ratios reflect a better risk-adjusted return profile, with the Sortino ratio showing a notable increase, emphasizing enhanced returns over downside volatility.

  • Treynor and Calmar Ratios: These ratios, while showing modest changes, align with the improved risk-return trade-off of the portfolio.

  • Profit and Loss Ratios, Positive Periods, and Gain to Loss Ratio: The increase in profit ratio and positive periods, along with adjustments in the gain to loss ratio, further underscore the strategy's efficacy and reduced risk.

The Importance of Unbiased Strategy

While our backtesting journey through Finestor's tool has provided valuable insights and demonstrated the potential for strategic optimization, it's crucial to remember the inherent limitations of relying solely on historical data. Historical performance is not a guaranteed predictor of future outcomes, and while history can often offer patterns, the financial markets are influenced by an array of unpredictable factors.

The key takeaway from utilizing backtesting tools like Finestor is the importance of developing a strategy based on sound analysis and diverse considerations rather than past trends or biases towards certain stocks or sectors. By continually testing, analyzing, and adjusting your investment strategy with an open mind and a critical eye, you can navigate the complexities of the market with greater confidence and agility.

The journey emphasizes the dynamic nature of investment strategy development—a process of constant learning, adaptation, and striving for a balanced, well-informed approach to achieving financial success.


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