Market insights and analysis

By Jerry Wagner

Detroit has fought its way back from a Rust Belt legacy and a bankruptcy process that was both debilitating and rehabilitating to earn its title as the Renaissance City. The city has reinvented itself. Its river walk has been named the best in the nation for three years. New skyscrapers are rising where decayed and abandoned buildings once stood. Streets that used to be lifeless concrete canyons now swell nightly with throngs of fun-loving partiers.

Sunday evening saw Detroit bathed in the twilight glow of a setting sun. I could have just enjoyed that feeling of late-summer bliss. But tonight was different. The city was buzzing with excitement.

Detroit, a founding member of the National Football League, has always been a football city. But the luster of the Detroit Lions’ early years, like that of its mother city, had badly faded. There have been no championships for the team since the late 1950s, only champion fans clinging to the promise of “next year.”

Sunday night was the beginning of yet another football season, and my family and I arrived at Ford Field filled with hope and excitement. The crowd, an energized mass of partygoers, shouted players’ names, turning them into chants, and then roars as fans returned to their sports Mecca.

We half-stepped our way forward in the crowd, jostling toward the narrow stadium gates. Inside, the noise and excitement immediately engulfed us. Step by step, we inched our way down the concourse and then descended to our seats 12 rows above midfield. A wave of sound that would not stop that entire evening crashed over us like a storm racing across a lake.

You could not stop cheering. The Rams were forewarned.

On each seat was a ribboned device to slip around your wrist. It was already blinking, white and blue. It could beat out any rhythm wirelessly sent from its operators. Those who tuned in to Sunday Night Football may have seen the tiny lights throughout the stands twinkling in time with the music and the game.

This year’s team motto was written on each ribbon: “It Takes More!”

I want to adopt that motto for Flexible Plan Investments (FPI). It perfectly encapsulates how we feel about serving our clients. We’re a small, Midwestern firm competing in an industry of bicoastal giants. To survive and thrive, it takes more. We strive to deliver more each day for our clients, offering white-glove service, providing state-of-the-art reporting and analysis tools, and supplying several ways to help financial advisers build their businesses and help their clients.

Just as the Detroit Lions know that it takes more than traditional methods to overcome decades of setbacks and reach for championship glory, we at FPI understand that in the competitive world of investment management, it takes more than traditional methods to succeed. That’s why we’ve embraced advanced techniques like walk-forward backtesting, our own version of a sophisticated “playbook” that evolves with every market “game.”

Strategy development: Walk-forward backtesting

Walk-forward backtesting is an advanced method for testing trading strategies. It bridges the gap between historical performance and real-world application.

Traditional backtesting uses all the information one has today to go back in time and recreate an optimal trading plan. It’s like having a coaching staff that, knowing the outcome of every future game, goes back and replays past games over and over again until they find a way to win. This approach can provide some insights, but in reality, the outcome could not have been obtained because no coach has perfect knowledge of the future at the time the game is played. They only know the information available at that moment, and the team must play the game with an uncertain future.

On the other hand, walk-forward backtesting develops the best strategy with the information at hand over a certain time in the past, sees how it works, and then uses only that knowledge to determine the performance over the next year’s market. It uses this process year by year to walk forward into the future, each year using the strategy deemed best based only on the then-available data. It seeks to avoid look-ahead bias. The result is not a strategy perfectly optimized to fit the past but one optimized to choose the best performer with the information available at the time.

Traditional backtesting is like the end-of-season press conference, where the coach analyzes the season with “woulda, coulda, shoulda” rationalizations. Walk-forward backtesting is more like being in the coaching staff meetings before each game throughout the season and then judging the results by the actual score of each game that resulted from the decisions made at those pregame sessions.

Playbook evolution: Walk-forward backtesting in portfolio management

We apply the walk-forward process not just during strategy development but also in the ongoing management of our client accounts. As new real-time data becomes available, we factor it in, and the strategy rules change to reflect the new information and market environment.

Just as a football team can tweak its game plan from drive to drive, we periodically optimize our strategies to respond to changing market conditions. In the fast-paced world of investing, it takes more than an occasional review to stay ahead of the game.

The application of our walk-forward approach to the management of an account is more like a team’s approach to an ongoing season:

1. Initial playbook (initial strategy): The team starts with a playbook based on past performance.
2. First few games (in-sample period): They use this playbook for a few games, analyzing what works and what doesn’t.
3. Adjustments (optimization): Based on these recent games, they adjust their plays.
4. Next game (out-of-sample period): They use the updated playbook in the next game to see how it performs in a real, unseen scenario.
5. Continuous improvement: This process repeats throughout the season. After each game, coaches analyze, adjust, and implement, constantly testing their new ideas in real-game situations.

This ongoing process of analysis, adjustment, and real-world testing closely mirrors the walk-forward backtesting approach we use in developing our investment strategies. It allows us to stay nimble, adapting our “playbook” to the ever-changing “game” of the financial markets. It takes more to come out on top in both football and investing.

Walk-forward backtesting in self-adjusting, turnkey multi-strategy portfolios

With our self-adjusting, turnkey multi-strategy portfolios, we take the process to its logical limits. We know it takes more than a one-size-fits-all approach to perform well in diverse market conditions. We automatically reallocate your portfolio (whether it be in our multi-strategy portfolios, multi-strategy core, or explore components) to suit the current market environment—much like a football team with multiple playbooks for different scenarios (offense, defense, special teams) adjusts in real time to maximize performance. It’s our way of positioning our portfolios so that no matter what the market “throws” at us, we have the opportunity to catch it and run with it.

Key advantages of walk-forward backtesting

Walk-forward backtesting is not a panacea. The market is extremely complex and always changing. It can confound any approach to mastering it. Overfitting and losses can still occur. But in over 40 years of using the methodology, we have discovered these key advantages:

1. Reduced overfitting: By continually optimizing strategies on unseen data, we minimize the risk of developing strategies that perform well only on historical data but fail in real-world scenarios.
2. Adaptive strategies: This approach allows us to create strategies that can adapt to changing market conditions, a crucial feature in today’s dynamic financial landscape.
3. Increased robustness: Walk-forward backtesting provides a more realistic assessment of a strategy’s performance, helping us develop more robust and reliable investment approaches.
4. Enhanced confidence: By more closely mimicking real-world trading conditions, we can have greater confidence in the strategies we recommend to our clients.

Using the power of adaptation to give clients more

At FPI, we’ve fully embraced the It Takes More mindset. Walk-forward backtesting is the cornerstone of our research process, embodying our commitment to going above and beyond to serve our clients. This approach allows us to develop strategies that are not only historically successful but also can be adaptable and robust in the face of future market challenges.

By continuously refining our approach, we aim to provide investment strategies designed to perform in the real world, not just on paper. Like a championship-winning football team that never stops analyzing, adapting, and improving, our investment approach evolves to tackle the challenges of the financial markets head-on.

The scoreboard in both sports and investing is always changing. But with our “It Takes More” approach, we’re ready for every play, every drive, and every market shift. At FPI, we know that victory goes to those who are always prepared to give more.

P.S. At the end of the game, the score was tied. Detroit won the coin toss, took the kick-off, marched down the field, and won the game. Yes, It Takes More!