The joke changes over time.
Through my twenties friends would clown about how long it takes to bounce back after an aggressive game of pickup basketball. Time passes and the jokes become more earnest, to the point of generating actual concern.
Combine a big night out with a morning soccer game and you land on the bench for a week. The longer you’re out, the further away your fitness goals become.
Whether you’re looking to drop ten pounds or just stay on top of gastronomic temptations, recovery time matters a lot. An ankle twist will sideline you for a couple months and then take twice as long to get your mile pace back in line.
NAV is no different. The all time high is always the benchmark, how long has it been since we were making money?
Despite our panicked behavior when they happen, investors do understand that losses occur. But how long they occur for is just as important. Long drags down money is one of the best ways to lose confidence. And if a significant time below the high water mark is hiding behind total return, it suggests a suspicious risk profile - what kind of positions are generating those infrequent outsized wins to dig you out of the hole they presumably created?
The time to recovery is an important metric to review in a backtest. Whether compared to a benchmark or simply itself, this statistic tells you a lot about the feel of this strategy’s ride. Volatility cuts one way, time spent losing money another.
Today in Backtest Notebooks, we’ll dig into how to measure this, how it looks in a sample strategy, and what it means for rebalancing amongst strategy sleeves.
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