Backtesting Calculator

How to Use This Backtesting Calculator

1. Define Your Portfolio: Add stocks or ETFs by ticker symbol (e.g., SPY, AAPL) and assign a percentage weight to each. Ensure your total allocation equals 100%.
2. Set Simulation Parameters: Enter your initial investment amount and choose the date range for the historical data.
3. Choose Rebalancing Strategy: Decide if and how often your portfolio should be rebalanced (e.g., Annually) to maintain your target asset allocation.
4. Analyze Results: Run the backtest to see your Final Portfolio Value, CAGR, Max Drawdown, and visual growth charts.

What is Backtesting?

Backtesting is a method used by traders and investors to simulate a trading strategy using historical data to generate results and analyze risk and profitability before risking any actual capital.

A robust backtest provides insight into how a strategy would have performed in the past, which can offer clues to its potential future performance, although it is not a guarantee.

Key Metrics Explained

• CAGR (Compound Annual Growth Rate): The mean annual growth rate of an investment over a specified period of time longer than one year.
• Max Drawdown: The maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. It is an indicator of downside risk over a specified time period.
• Sharpe Ratio: A measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment. It measures risk-adjusted performance.
• Volatility: A statistical measure of the dispersion of returns for a given security or market index. Higher volatility often means higher risk.

Why Backtest Your Portfolio?

Before committing capital to a specific asset allocation, it is crucial to understand its historical behavior. Does it withstand market crashes? Does it provide steady growth? Backtesting helps you:

• Validate your investment thesis.
• Understand the potential risks and drawdowns.
• Optimize your asset allocation for better risk-adjusted returns.
• Build confidence in your long-term strategy.

Frequently Asked Questions

Is past performance indicative of future results?

No. Backtesting shows what would have happened in the past. Markets change, and historical patterns may not repeat. However, backtesting is valuable for stress-testing strategies against known historical events.

What is the difference between rebalancing and buy-and-hold?

Buy-and-hold involves buying assets and holding them regardless of price fluctuations. Rebalancing involves periodically buying or selling assets to maintain your original desired asset allocation, which can force you to "sell high and buy low."