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You will eventually need to decide which Investment Profile best fits your personality. This is actually not an easy thing to do. Personally speaking, I had a hard time figuring mine out. The more risk one is willing to take the higher the potential reward. On the other hard, if things absolutely turn to dirt and your portfolio is 175% invested you will take a very serious hit. There are things that can happen which can't be predicted. For example, if New York City gets hit with a Weapon of Mass Destruction who knows what would happen to the market?? This is something which I keep in the back of my mind. The information which follows is designed to help you figure out your Investment Profile.
The Stock-Optimizer neural network is based on data which spans a 20 year time period. The first thing I do when I build a neural network is break the data up into two parts, training data and test data. Over 20 years there are roughly 5000 market day’s worth of data. By random selection 50% is specified as training and 50% is specified as test. The neural network is then "shown" the training data. It learns everything it can with regard to how the indicators relate to the output, S&P 500 change in price over seven market days. It constructs an algorithm that is highly optimized. The algorithm is so good, if training data is input to the neural network after it is trained it will provide predictions which are ridiculously accurate. In actual operation it can't possibly duplicate this level of accuracy. Reason being, while training, it finds coincidental relationships which help it explain the outputs it is being shown. These coincidental relationships explain the training data output very well but they don't really exist and they won't show up in the test data or real time data when the neural network is put into operation. For example, according to the "Super Bowl Indicator," a triumphant team from the old American Football League (now the American Football Conference, or AFC) foreshadows a down market. Granted, in the past this relationship has correlated well. But, is there really a relationship between the market and who wins the super bowl, heck no!! It's a coincidental relationship.
I don't evaluate a neural network's effectiveness based on training data results. Instead I run the test data through it. The neural network makes its outcome predictions and then I compare these predictions with the actual outcomes. I've been building financial neural networks for 12 years now and this one tests out well.
The results below are based on 2488 market day’s worth of test data. At this point in time they are the best estimate of what can be expected. Close scrutiny of the data will show that this system doesn't outperform every year but it does nine out of every ten years.
Note: Buying and holding a 100% invested position in the S&P 500 returned an average of 9.4% annualized, this is our benchmark. The S&P 500 actually returned slightly less than 9.4% over these 20 years but remember I randomly assigned 50% test data and 50% training data. The test data returned 9.4%, the combination of test and training data is lower. 9.4% is used as our benchmark because we are interested in how the system performs on the test data only. The following metrics are straight out of my development database. They should help you decide your investor profile.
Gigantic Risk Investor:
Days Tested = 2488
S&P 500 annual return = 9.4%
Stock-Optimizer annual return (trading the S&P500) = 23.9%Portfolio Level
8.55% of the time you will be between 200% and 175% invested
18.17% of the time you will be between 175% and 150% invested
29.32% of the time you will be between 150% and 125% invested
14.53% of the time you will be between 125% and 100% invested
13.43% of the time you will be between 100% and 75% invested
4.04% of the time you will be between 75% and 50% invested
6.22% of the time you will be between 50% and 25% invested
2.12% of the time you will be between 25% and 0% invested
1.48% of the time you will be between 0% and -25% invested
0.96% of the time you will be between -25% and -50% invested
0.6% of the time you will be between -50% and -75% invested
0.34% of the time you will be between -75% and -100% invested
0.04% of the time you will be between -100% and -125% invested
0.14% of the time you will be between -125% and -150% invested
0.08% of the time you will be between -150% and -200% invested
Results by Test Year Year Market Days Tested Annualized S&P 500 ROI Annualized System ROI 1987 123 42.4% 61.9% 1988 130 11.1% 17.7% 1989 127 15.3% 31.9% 1990 122 -24.1% -28.9% 1991 130 33.6% 44.4% 1992 126 4.5% 13.3% 1993 124 17% 18.9% 1994 130 2% 6.5% 1995 126 31.3% 40.5% 1996 126 19.2% 22.3% 1997 124 26.6% 50.3% 1998 128 28.7% 49% 1999 131 16.3% 50% 2000 118 0.2% 32.1% 2001 124 -39.5% 19.9% 2002 126 -16.6% -1.1% 2003 130 16.2% 32.6% 2004 121 -2.7% -11.2% 2005 131 -2.8% 6.3% 2006 91 6.6% 16.2% .........................
High Risk Investor:
Days Tested = 2488
S&P 500 annual return = 9.4%
Stock-Optimizer annual return (trading the S&P500) = 19.8%Portfolio Level
13.21% of the time you will be between 175% and 150% invested
28.38% of the time you will be between 150% and 125% invested
28.64% of the time you will be between 125% and 100% invested
14.87% of the time you will be between 100% and 75% invested
9.03% of the time you will be between 75% and 50% invested
3.08% of the time you will be between 50% and 25% invested
1.36% of the time you will be between 25% and 0% invested
0.88% of the time you will be between 0% and -25% invested
0.34% of the time you will be between -25% and -50% invested
0.14% of the time you will be between -50% and -75% invested
0.08% of the time you will be between -75% and -100% invested
Analyse Both Test-2
Results by Test Year Year Market Days Tested Annualized S&P 500 ROI Annualized System ROI 1987 123 42.4% 56.7% 1988 130 11.1% 15.8% 1989 127 15.3% 26.9% 1990 122 -24.1% -27.1% 1991 130 33.6% 41.1% 1992 126 4.5% 9.9% 1993 124 17% 18.2% 1994 130 2% 5.2% 1995 126 31.3% 37.7% 1996 126 19.2% 21% 1997 124 26.6% 43.7% 1998 128 28.7% 44.5% 1999 131 16.3% 40.3% 2000 118 0.2% 22.9% 2001 124 -39.5% 2.2% 2002 126 -16.6% -4.6% 2003 130 16.2% 28.2% 2004 121 -2.7% -8.9% 2005 131 -2.8% 4.1% 2006 91 6.6% 13% .........................
Tangible Risk Investor:
Days Tested = 2488
S&P 500 annual return = 9.4%
Stock-Optimizer annual return (trading the S&P500) = 16.6%Portfolio Level
20.34% of the time you will be between 150% and 125% invested
37.85% of the time you will be between 125% and 100% invested
26.72% of the time you will be between 100% and 75% invested
9.87% of the time you will be between 75% and 50% invested
3.36% of the time you will be between 50% and 25% invested
1.32% of the time you will be between 25% and 0% invested
0.38% of the time you will be between 0% and -25% invested
0.16% of the time you will be between -25% and -50% invested
Results by Test Year Year Market Days Tested Annualized S&P 500 ROI Annualized System ROI 1987 123 42.4% 50.8% 1988 130 11.1% 14.1% 1989 127 15.3% 23% 1990 122 -24.1% -24.8% 1991 130 33.6% 37.1% 1992 126 4.5% 7.9% 1993 124 17% 16.8% 1994 130 2% 4.1% 1995 126 31.3% 34% 1996 126 19.2% 19% 1997 124 26.6% 37.8% 1998 128 28.7% 39.3% 1999 131 16.3% 33.2% 2000 118 0.2% 17.1% 2001 124 -39.5% -5.8% 2002 126 -16.6% -6.3% 2003 130 16.2% 24.2% 2004 121 -2.7% -7.2% 2005 131 -2.8% 2.8% 2006 91 6.6% 10.5% .........................
Average Risk Investor:
Days Tested = 2488
S&P 500 annual return = 9.4%
Stock-Optimizer annual return (trading the S&P500) = 13.7%Portfolio Level
30.68% of the time you will be between 125% and 100% invested
33.67% of the time you will be between 100% and 75% invested
27.78% of the time you will be between 75% and 50% invested
6.24% of the time you will be between 50% and 25% invested
1.4% of the time you will be between 25% and 0% invested
0.24% of the time you will be between 0% and -25% invested
Results by Test Year Year Market Days Tested Annualized S&P 500 ROI Annualized System ROI 1987 123 42.4% 43.2% 1988 130 11.1% 12% 1989 127 15.3% 18.7% 1990 122 -24.1% -20.6% 1991 130 33.6% 30.6% 1992 126 4.5% 5.5% 1993 124 17% 14.2% 1994 130 2% 2.9% 1995 126 31.3% 28.3% 1996 126 19.2% 15.7% 1997 124 26.6% 31.4% 1998 128 28.7% 34.6% 1999 131 16.3% 26.9% 2000 118 0.2% 13.9% 2001 124 -39.5% -6.7% 2002 126 -16.6% -5% 2003 130 16.2% 20.1% 2004 121 -2.7% -6% 2005 131 -2.8% 3.2% 2006 91 6.6% 7.5% .........................
Low Risk Investor:
Days Tested = 2488
S&P 500 annual return = 9.4%
Stock-Optimizer annual return (trading the S&P500) = 11.9%Portfolio Level
11.61% of the time you will be between 125% and 100% invested
29.32% of the time you will be between 100% and 75% invested
30.44% of the time you will be between 75% and 50% invested
26.26% of the time you will be between 50% and 25% invested
2.16% of the time you will be between 25% and 0% invested
0.22% of the time you will be between 0% and -25% invested
Results by Test Year Year Market Days Tested Annualized S&P 500 ROI Annualized System ROI 1987 123 42.4% 37% 1988 130 11.1% 10.4% 1989 127 15.3% 15.2% 1990 122 -24.1% -16.4% 1991 130 33.6% 24.6% 1992 126 4.5% 3.4% 1993 124 17% 11.8% 1994 130 2% 2.3% 1995 126 31.3% 23.6% 1996 126 19.2% 12.7% 1997 124 26.6% 26.7% 1998 128 28.7% 32.3% 1999 131 16.3% 22.9% 2000 118 0.2% 13.2% 2001 124 -39.5% -5.1% 2002 126 -16.6% -2.1% 2003 130 16.2% 17.7% 2004 121 -2.7% -5.5% 2005 131 -2.8% 4.3% 2006 91 6.6% 5.2%