Validating a Strategy Ft. Rebalancing

If you love the results when you backtest a screener but find a difference between the screener and reality, you are probably missing a vital step! Validating your strategy before taking action is a simple step you don’t want to overlook.

Something as simple as testing over extended periods of time, flipping through data columns, and rebalancing can make a world of difference. Rebalancing is what this article will focus on.

The Value of Rebalancing a Strategy

What does it mean to validate a strategy? It means to ensure that it is ACTUALLY a successful strategy and not just a randomly doing well in the market. Validating a strategy means removing any outliers or unpredictable fluctuations while strengthening your understanding of the best approach to that strategy.

What is rebalancing? When you take your account, analyze all your investments against the original criteria you invested under. If any securities no longer fit that criteria, you sell them.

How does rebalancing validate a strategy? Every strategy demands a certain amount of time. Some are more time-intensive (day traders), while others are passive. Rebalancing a screener with different criteria when you backtest will inform you of the best (or worst) times to rebalance.

Some strategies will only be successful if you rebalance monthly/quarterly. Meaning it requires frequent attention. If you rebalanced yearly, there might be a better strategy for something so passive. In contrast, other strategies require less time and would be more hands-off. You could find a low-volatile strategy and allow your investments to sit pretty without rebalancing.