What is "Wealth-Lab Score"?
Author: LenMoz
Creation Date: 3/8/2013 4:33 PM
profile picture

LenMoz

#1
The last item in the Performance Report is WealthLab Score. How is this detemined?
profile picture

Cone

#2
See the equation in the User Guide > Preferences > Performance Visualizers > Performance
profile picture

LenMoz

#3
I found it, but don't necessarily like it.

The method of calculating WealthLab Score does not necessarily compare apples to apples, because it doesn’t allow for market conditions in Maximum Drawdown Percent. I can game my score by choosing only "good" market years. This is important because subscribers may look to the score as a shortcut method of choosing a strategy to purchase. I only get a 19.45 score on a 5-year test, but a 45.63 score on a 3-year test. One suggestion might be to use the strategy's maximum drawdown "relative to the buy-and-hold maximum drawdown". See my example, where the same model scores more than twice as well by not backtesting over down years.

Example using “Small Tech NN Trader”, using the same portfolio for a 5-year and 3-year backtest:

5-year backtest-
Maximum Drawdown % - -56.14% on 3/9/2009
Maximum Drawdown % Buy-and-hold - 58.15%
Annualized Gain - 31.61%
Exposure - 71.27%
***** WealthLab Score = 19.45

3-year backtest-
Maximum Drawdown % - -25.32% on 10/3/2011
Maximum Drawdown % Buy-and-hold - 33.63%
Annualized Gain - 39.65%
Exposure - 64.88%
***** WealthLab Score = 45.63
The 3-year test scores much better, having a smaller drawdown, but only because it didn’t include the down years of 2008-9.

Len
profile picture

Eugene

#4
One way or another, in backtesting almost anything can be made up. ;)
profile picture

LenMoz

#5
Yow, interesting response. Even more reason why the WealthLab Score should be dropped, if so easily gamed.

Again, "This is important because subscribers may look to the score as a shortcut method of choosing a strategy to purchase.", I think the formula is so flawed it should be dropped from the description screen.

The current formula severely penalizes high risk, high reward strategies, which inherently have a high drawdown.
profile picture

Eugene

#6
My response just meant to say that in the hands of a skilled curve fitter, any performance metric can be used for window dressing.

Penalizing high risk systems is sane, because it's likely that a subscriber will rather quit soon than be patiently stomaching a -50% drawdown. Not going to happen.
profile picture

LenMoz

#7
Yes, yes. "How To Lie With Statistics" was written way back in the 50's.

I'll agree to disagree on this one. Mutual Fund MXXVX is a 5-star Morningstar focused fund, high risk, high reward, huge drawdown. I own it. It's not necessary to penalize high risk, just let investors be aware of it to adjust their allocation.

Thanks for the speedy responses.

Perhaps consider making the WealthLab Score formula available to subscribers as a "What is this?" pop-up.
profile picture

LenMoz

#8
Sorry, I just can't quit. "Annualized Gain" seems to me a readily available and important comparative performance statistic, yet it is missing from the Performance Report. Can this be added?
profile picture

Cone

#9
Did you mean to write something else? Annualized Gain % is 5th from the top (and used in the WL Score, where the same thing is called APR).

If you don't see it, make sure that you're running in Portfolio Simulation mode (not in Raw Profit mode).
profile picture

LenMoz

#10
I didn't mean in WealthLab. I meant the Perfomance Report on a strategy's WealthSignals System Report web page, where a potential subscriber might see it.

This is a subset of the WealthLab software report. In my case, see- http://www.wealth-lab.com/WealthSignals/SystemDetails/Author/145.

The WealthSignals performance web page report starts with "Winning Position Rate" and ends with WealthLab score. The implication is that WealthLab score is a combination of the fields above it, but it's not. WealthLab Score only considers APR, exposure, and Maximum Drawdown Rate. Max Drawdown and Exposure are shown, Why not APR? I still maintain it's a too simplistic formula and misleading, per the example I noted at the outset.

At the end of the day, as a subscriber, I'm interested in risk and return, and should expect to pay for high return with increased risk. To Eugene's point, drawdown percent and Win Rate are important, so the subscriber doesn't get fearful, of course.
profile picture

Cone

#11
I agree with you completely and APR is already available/calculated for the WealthSignals Performance list. It's likely to be aded after the Beta phase, which has been extended to mid June.
profile picture

vk

#12
Hi LenMoz, I think you have some good points here and some excellent ideas. Hopefully we can add some of the features you mentioned after the beta launch. Believe me we had big discussions among our group which performance numbers to include and which we shouldn't. One thing is sure, we will add more as time goes by since we believe that a potential subscriber should be as informed as possible.