Systematic investing is a way in which investors use scientific testing and mathematical data to make investment decisions.
Whether you’re new to the investing world or researching ways to improve your investment opportunities, this type of strategy may have crossed your path. But what is it and how does it work?
Read on to find out more about this type of investment approach and why it’s seen as the future of investments by many investors.
What Is Systematic Investing?
Systematic investing is when investors use maths and data from previous investments to make an investment decision. It helps work out whether a trade is risky or profitable.
You may also know it as the terms ‘quanta investing’, ‘algorithmic investing’, ‘data-driven investing’ or ‘rules-based investing’ where traders predict a stock’s potential for success using statistics from historical data.
Using quantitative data such as historical data helps develop mathematically-based algorithms making it easier to predict the outcome, giving the best chance possible of success.
How Does it Work?
The quantitative strategy will evaluate performance potential whilst also looking at other factors which could impact the process and its performance.
It’ll then be put through the backtesting process, testing it against historical data. This will bring about mathematical information that an investor can look at to decide whether the trade has a good chance of bringing a return.
To sum up, systematic investing is all about creating a customised trade hypothesis that can be tested to provide data. This data is used to help an investor determine whether an investment has the possibility to be successful or not. Risks are reduced by using mathematically historical data.
For example, a trader could create a strategy which identifies the best performances when the market is in good condition. This can then be used again in the future when the market is going well to pick out stocks likely to perform.
This is a very basic way of explaining how it works, and it’s key to remember that it’s also highly down to the investor to make an informed decision using the data and choosing a trade.
How often you trade is also important, as systematic investments will usually perform better if the strategy is in place for a long time. A deep understanding of the process is required if low-frequency trading is being used.
As with all types of data, you aren’t guaranteed anything. Just because something worked historically, doesn’t mean it will work again. And this is especially accurate when it comes to investing.
Things like a stock market crash can’t always be predicted or picked up.
And if lots of people start using the same strategy, this can also affect its results. So keep this in mind when using systematic investing.
Other risks involved with this type of strategy include:
- Systematic investing can take a long time to work, so be prepared to be patient
- It’s hard to control influences like interest rates and trade costs which can impact an investment
There’s no guarantee that using systematic investing will be a success, but it does help highlight the risks. This way investors can make a more informed choice about a certain trade or investment.
And if it works, that strategy can be used continuously. But remember, things can change, so it’s crucial to always do the research to avoid a huge loss.
Is Systematic Investing for You?
Trades and investments are complicated processes. Using tactics like this can be helpful in assessing risks and working out what is most likely to perform well and can provide valuable data to suggest potential value in stocks.
If you like using historical data to base an investment decision, this type of strategy is for you.
It allows you to take a step back from the investment process, looking solely at the numbers and the data with no emotion behind it. This can bring out much better outcomes, but a good understanding of the process is also required for this.
Using proven theories to invest, whilst also identifying risks and returns, is a good way to go about the investment journey.