Rule based investing refers to a quantitative investment approach that relies on pre-defined rules to make trading decisions. It has become increasingly popular in recent years as computing power grows and big data analytics advance. This article explains what rule based investing is, why it works, and how investors can adopt this strategy. There are multiple mentions of the key phrases rule based investing and investing to fit search engine optimization (SEO) best practices.
Backtested systematic strategies outperform discretionary approaches
The key advantage of rule based investing lies in its systematic nature – all trades are conducted based on backtested rules instead of human discretion. Studies have shown such model-based strategies tend to outperform human judgement over the long run. By coding rules into computer models, investors can also better understand what drives returns and avoid behavioral biases.
Data mining guards against overfitting
A common critique against rules-based strategies is that they could be overfit and fail to work on out-of-sample data. However, by applying proper statistical techniques like walk-forward analysis and Bayesian regularization, the model robustness can be validated. Big data also provides more samples for testing to reduce generalization errors.
Execution efficiency and customization
Rule based strategies excel in consistent and efficient execution once the infrastructure is set up. Investors can also customize rules to express their unique views or adapt to changing market regimes. Overall, rule based investing represents a flexible and scalable approach to quantitative investing with demonstrated long-term success.
Democratized access via robo-advisors
In recent years, robo-advisory services have helped democratize access to systematic investing strategies for retail investors. By lowering costs and minimums through automation, individual investors can now allocate capital in rules-based ETF portfolios optimized for their preferences and risk tolerance.
In conclusion, rule based investing refers to systematic quantitative strategies that rely on backtested rules for trade signals. It represents a transparent, execution-efficient and customizable approach to investing that has outperformed discretionary methods over the long run. With computing power and big data analytics improving, rules-based strategies would become even more accessible to investors.