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:

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.

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:

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.

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.

Q1 confirms that instability is the rule in the markets

The closing of the Q1 in the markets confirms that this will be a complicated year for equities. The Great Crisis that the world lived since 2007-2008 is not ended at all, as there are some points of instability. Some of them are related to international politics: the shadow of terrorism, the wars in Middle East, the fight in the European Union and the US elections are some points to watch that affect the market evolution. However, there are also financial and economic troubles to solve: the ECB policies show that they are not enough to stabilise the European credit flows and return to some inflation, while the Federal Reserve stays cautious in the next steps to follow in its monetary policy. No one wants to be blamed of being a cause of a second big recession.

The T-Advisor charts show these statements. As we can see in the both charts below, comparing the general trend in global regions, there has been a positive evolution between the beginning of the year (above) and the end of the Q1 (below), but very slight apart from the Latam region:

If we check the evolution in each region, we can perceive much better the specific changes:

EUROPE

Besides the traditional parallel evolution amongst the European markets, it is also to underline that no main stock exchange registered positive returns YTD. The recovery from February was stopped by the instability created by the possibility of a Brexit (an independence of UK from the EU) and the terrorist attacks in Brussels, in the heart of the capital city of the European institutions. The ECB has also lots of troubles to make efficient their decisions, because its expansive policy has still no positive effects in the real economy to consolidate the general recovery.

AMERICAS

The trend is positive since the second half of January, but S&P Index was finally positive YTD in the last weeks of the Q1. The uncertainties related to the US election (no candidate is clearly heading the primary elections) and economic evolution make investors cautious. However, the announcement of the Fed about a delay in the next rate hikes was welcomed and consolidated the slight bullish trend.

The market behaviour was better in the emerging countries, although some evolutions are very linked to national decisions. For instance, the evolution of Argentinian Merval in March was erratic because of the agreement with the creditor funds, which was not totally assessed as positive by investors. In the case of Brazil, the cases of corruption in the Government have determined the ups and downs in Bovespa.

ASIA

The biggest markets (Shanghai and Tokyo) are really bearish and sum a very negative YTD return in this Q1. In China, the bubble broken last summer produced a hard landing in which the market is still moving. The trend is erratic or, better said, there is no trend. In Japan, there are worries about the global evolution, because the country has a great support from its exports. The doubts about the economy, underlined by the low oil price, and the instability of the exchange rate with the dollar are two hard reasons to be wary.

What can we expect in the Q2? We do not like to make any prediction or copy what others expect, but we prefer to alert about some relevant issues:

• Look at the oil price: it is linked with the global activity.
• Follow the Fed and ECB decisions: the Fed is progressively hawkish and the ECB should be more dovish to push the credit flow and inflation in the Eurozone.
• Watch the Q1 profits of the companies, because they provide a guide about the economic activity.
• Be wary about emerging markets: the dollar evolution (if the Fed hike the rates) can be negative for them.