Backtesting is not the way forward for structured products

There is peril if you look back, confusion if you look forward, but no way that you can stand still. The backtesting of structured products is considered poor form by many regulators, some of which are driven to ban the whole practice, while others express doubt about the practicality of using future projections to provide any reliable or understandable assessment of a structured product's quality.

The extent of views on backtesting range from those of the International Organization of Securities Commissions, which suggests the practice can be useful, to others such as the US Financial Industry Regulatory Authority (Finra), which is quick to say it should not be relied on.

Instead of looking backwards to guide you in the future, Finra makes the eminently sensible suggestion that investors should rely on future projections as the only guide to the potential success of their investment choice. In a refreshing take on exactly how to make this most hazardous of decisions about where to stick your investment cash, the US regulator has adopted an approach that must make the most sense.

After all, past performance is no guide to what comes next. Furthermore, experts have spent years toiling over complicated mathematics in an effort to predict the future. The question is what do investors rely on when they put their money on the table? The answer is that they make an educated guess about what may happen in the future. If they want total safety, they opt for either cash or money markets, or even government bonds. Slightly bolder investors opt for a diversified equity portfolio, basing their comfort on a spread of investments that cannot all go wrong. The even bolder ones select individual shares. Structured products are the next step. Whichever decision investors make, the motivation has to be what they think will happen next, so, despite the qualms of banks, isn't it about time that future projections became the sole source of discussion when considering how to invest?

Speaking of the future, after eight years as editor of Structured Products, the time has come for me to move on. Thanks to everyone for making it such an enjoyable time, and good luck.