What is the market model’s objective and what is a reasonable expectation of how the model will perform in a bull market and a bear market?
The market model is designed to perform well over a full market cycle (bull market and bear market). The model allocates more heavily to the growth side of the portfolio when the odds of investment success are improving or are clearly in our favor. The model allocates more heavily to the conservative side of the portfolio when the odds are deteriorating (correction) or when the odds are against us (bear market). The terms odds and probabilities speak to risk and reward.
There is a high probability the model will produce positive returns during a bull market. The longer the bull market lasts, the higher the probability the model will participate.
In a bear market, the first objective is to beat the S&P 500 (protect principal from large losses). The second objective is to produce positive returns by allocating to conservative assets, such as bonds. The longer a bear market lasts and the greater the magnitude of the losses in the stock market, the higher the probability both bear market objectives will be met.
The model is designed to minimize the probability of (a) missing the opportunity to profit in a bull market, and (b) incurring hard-to-recover-from losses in a bear market.
The model can help investors answer the two most important questions discussed in this article. The key to leveraging “the miracle of compounding” is to produce consistent returns and to avoid large losses. The CCM Market Model improves our odds of producing consistent returns, and reduces the probability of incurring large losses.
While the market model is based on sound economic and investment principles, there is no guarantee any of the objectives will be met in the future. The terms odds and probabilities also speak to uncertain outcomes. Risks are covered in more detail in the CCM Client Agreement and LPOA.