Bootstrapping: an example of how it works for specific assets

In a post that we published two weeks ago, we reported that T-Advisor uploaded a new bootstrapping tool to forward testing assets and portfolios. We explained some ideas about how it works, but we are going to show today the results with specific examples.

For instance, let’s simulate a bootstrapping for S&P 500 for the next 20 years. We can select the highest number of trays: 10,000. The more number of trays we choose, they best probability analysis we get. In this case, these are the results:

S&P bootstrapping simulation

Data provide that the maximum possible loss is 25.14% in 4.5 years, but after this point, the poorest result goes up and becomes positive 16.6 years later. Expected probable returns in 20 years are 296%, what means a 15% annually. What does it mean? Investing produces profits in the long term.

The cumulative returns distribution shows also that the highest probability is that S&P performs between -72.9% and 206.82% in around the 40% of the cases.

S&P cumulative return distribution

Let’s get an example from a fixed income fund. It is a bond high yield fund. We simulate with the same conditions: 20 years and 10,000 trays. This is the result:

Fixed income fund bootstrapping simulation

The maximum possible loss is 17.26% in 5.2 years and it reaches probably the breakeven near the 20th year. Expected probable returns in 20 years are 113%, that means a 5.6% annually. In this case, fixed income performs lower than stocks, but possible losses are also less.

The cumulative returns distribution shows also that the highest probability is that the fund performs between 61% and 124% in around 27% of the cases. There is also a probability of 22.5% of obtaining between -1.4% and 61%. If we compare this figures with the S&P bootstrapping, the range is shorter, that means, it is less volatile.

Fixed income fund cumulative returns distribution

What can we conclude?

  1. Investing performs positive in the long term and probably with higher returns than other products.
  2. People should forget to become rich in a year when they invest. Results are clear only in the long term. We have to consider shares and funds investing as an asset amongst other ones.
  3. Bootstrapping provides ONLY probabilities, NOT certainties. When we forward test, we obtain signals, clues and ideas about the possible trends. That is why to read carefully and analyse quietly the results.
  4. At the end, investing is a kind of job that needs a very important value: patience.

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