The initial version of our Correction Protection Model (CPM) was created in 2013 in response to some of our Registered Investment Advisor (RIA) clients who asked for a simple, data-driven way to determine whether they should be adding or subtracting risk from client portfolios. Most of these clients — who tend to be older, wealthier, and more risk-averse — asked for a quantitatively driven way to invest in the stock market but with significantly less risk. CPM does that exceptionally well with a beta of just 0.43 versus 1.0 for the S&P 500.
We have also had many client requests over the years for more aggressive models and have been working on that, in addition to other projects. What we have found is that, while CPM is very conservative and exceptionally good at reducing market risk — the model’s Risk On and Risk Off signals can also be used to produce more offensive-minded results by simply modifying the ETFs we use to participate in it.
We have developed 3 different ways to use CPM to satisfy different risk appetites:
*** All 3 utilize the identical CPM Risk On and Risk Off signals. ***
- Standard CPM: the most conservative (and original) version of the model is significantly less risky than the S&P 500. For older or more risk-averse investors that want to or need to participate in the stock market but are uncomfortable with the amount of risk. The hypothetical results below were produced by using the SPDR S&P 500 ETF Trust (SPY) as the trading vehicle.
- Enhanced CPM: has risk characteristics that are more similar to the S&P 500. For those willing to accept a little more risk than CPM Standard for the potential of producing better-than-average returns. The hypothetical results below were produced by using a combination of 67% SPDR S&P 500 ETF Trust (SPY) and 33% ProShares UltraPro S&P500 (UPRO, which seeks daily investment results that correspond to three times the daily performance of the S&P 500) as the trading vehicles.
- Aggressive CPM: the most aggressive version of the model, moderately riskier than the S&P 500. For those willing to accept additional risk for the potential of significantly outperforming the market. The hypothetical results below were produced by using the ProShares UltraPro S&P500 (UPRO) as the trading vehicle.
More charts and data pertaining to the hypothetical 10-year performance of these three versions of CPM are available by Clicking Here.
Disclosure: All investment models have inherent limitations in that they look back over previous data but can’t see into the future. Hypothetical past performance does not guarantee future results. Attempting to avoid a market decline by moving to cash comes with the inherent risk of potentially missing out on upside performance. However, we believe our model’s hypothetical performance data is a testament to intelligent quantitative risk management, showing that a conservative, systematic, and repeatable process of active management can, over time, significantly outperform passive buy and hold investing. Asbury Research’s models and investment research are used to inform our subscribers and clients but do not imply an actual investment portfolio.