Beware the Back-Test Investment Kings and Their Perfect Hindsight

Of course, it never worked because no one ever used this methodology; it just looked good theoretically in hindsight. Unfortunately, the investment industry is awash in advisors who must serially change what they’re doing – or just their marketing -- so they have something attractive to sell; their actual records won’t convince anyone.

Many legitimate advisors use back-testing to plan their investment process. They are mindful of the market and economic conditions at the time, and if they believe that back-tested “results” can be repeated, these same conditions must exist. Yet the back-test sellers don’t worry about this one whit. In the markets, as in the NFL, conditions are never precisely repeated. If they were, football wouldn’t be so unpredictable and the markets wouldn’t be the random beasts they are.

So when you hear about an ETF — or any other investment — that has had “results” that are too good to be true, ask annoying questions. And always read the fine print. It may be nothing more than a back test prompted by an historical look at what would have worked, not what did.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Ted Schwartz, a certified financial planner, is president and chief investment officer of Capstone Investment Financial Group. He advises individual investors and endowments, and serves as the adviser to CIFG UMA accounts. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on how to achieve their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at ted@capstoneinvest.com.

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