Hi Has anyone tried the portfolio builder under Tws trading tools? The back test seems too good to be true. If you choose closely held and maximized the leverage to 500% long and 180% short you get over 700% return over six years and the draw down is only 10%. does anyone know how does the back test work? Thanks
I am not aware of the product or of how it performs its backtesting. I can tell you this however. Most historical backtests of portfolios tend to look great because of the generally very low correlation of components. But when the SHTF, all correlations go to 1. That 10% drawdown is going to be a 200% drawdown. When the SHTF, your performance will be no better than the worst component in the portfolio, if you are lucky. The bottom line is this: You gain NO benefit in terms of risk-reduction by diversifying (the benefits there are only on normal days, not on days where you will need it the most). The benefit of diversification is implicit leverage -- being able to get off more "system holding periods" in the same number of holding periods, hence higher returns. But you have a bigger, more complicated risk picture to contend with.