Investment CPR is an investment strategy designed to produce Consistent Positive Returns in the stock and bond markets by combining traditional investment strategies (i.e., so called “long” or “relative return” strategies) with strategies that hedge against market declines (i.e., “alternative” strategies) . The CPR strategy recognizes that the future is unknown; as such, it is highly sensitive to current economic conditions.
We begin with a baseline portfolio allocated 1/3 to traditional stock strategies, 1/3 to traditional bond strategies and 1/3 to alternative strategies. We adjust the allocations to match current economic conditions. When current conditions do not favor stocks, we reduce the allocation to stocks and increase the allocation to bonds and/or alternatives. When current conditions do not favor bonds, we reduce the allocation to bonds and increase the allocation to stocks and/or alternatives. In either case, we do not intend to go below 1/3 allocated to alternative strategies. Alternative strategies are designed to perform regardless of market conditions. They typically produce returns that are approximately 2% to 4% higher than the return on U.S. Treasury bills. As of this writing, that translates to an annual return of between 7% and 9%. In this way, we always have a solid portion of our portfolios generating returns in excess of the risk free rate of return. At times when conditions do not favor stocks or bonds, we will certainly go much higher than 1/3 in alternatives.
The strategy differs markedly from the typical “buy-and-hold” strategy that so many investors follow. We believe “buy and hold” as practiced by most investors is more aptly named “buy and hope” — buy stocks, then hope and pray they go up. This “hope and prayer” approach is premised on the belief that investors can neither time nor outperform the broad market in the long run. Rather than try, the hope and prayer approach urges investors to simply jump on board by buying index or index-type vehicles. This ties investors to the vagaries of the markets. We do not argue with the fact that long term index investing has provided positive returns over time. However, we challenge the notion that the only way to get those long term positive returns is to invest passively in an index. The market’s long term returns come with volatility, at times extreme volatility. It is at times of extreme volatility – both upward and downward – that investors fall into the trap of the hope and pray approach. When the market is at a high extreme, investors tend to get euphoric and begin to pile in, typically just when they should be pulling back. Conversely, when the market is at a downward extreme, investors tend to pull out, just when they should be recognizing the values around and considering whether to add more money to fund new purchases.
Alternative strategies that use hedging techniques help eliminate the ups and downs that accompany passive index investing. Such strategies take advantage of both up and down markets. The generate consistent returns; however the cost of protecting against down markets will limit upside returns in a bull market. The flip side is that the strategies protect against down markets. The overall result is a generally consistent return regardless of whether the markets move up or down; no extreme highs, no extreme lows.
Recognizing this pattern of returns, we dedicate at least one third of our portfolios to alternative strategies. At the same time, we recognize that there are times when we want to be ine traditional strategies, i.e., in bull markets we are happy to let the market do the heavy lifting and generate returns that likely will outperform hedged strategies. And so we generally will keep at least some portion of the portfolios in traditional strategies. The key to Investment CPR is to recognize those times when conditions favor traditional strategies, to recognize when conditions favor hedged strategies and to adjust portfolio weightings accordingly. As such, we spend little time dwelling on past returns or speculating about future returns. Rather, it is critical that we stay focused on the present moment, to observe present conditions and make sure we are allocating to strategies with the strongest probability of performing well in the current environment. In effect, we seek to take advantage of upward volatility with traditional strategies when the market is rising and guard against downward volatility with hedged strategies in bear markets.
If you are looking for consistent returns that generate returns comparable to those of the markets over time, but without the extremes of speculative bull markets and grinding bear markets, we invite you to explore Investment CPR.