FAQ - MAIN MENU
WHY IS BEATING THE MARKET EVERY YEAR A FLAWED INVESTMENT GOAL?
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t ... pays it.”
The CCM Market Model attempts to leverage the miracle of compounding by producing consistent returns over a full market cycle (bull market and bear market). Impressive returns are nice during a bull market, but without a bear market strategy, years of gains can be lost in a matter of months.
The hypothetical examples below are shown to illustrate the power of consistency versus large portfolio drawdowns during inevitable bear markets. Both strategies below start with $500,000. Strategy A seems to be "killing" Strategy B for the first five years (2003-2007). However, the limitations of Strategy A, which has no plan for bear markers, are apparent in year five (2008). Despite the impressive returns in the early years, the miracle of compounding works against Strategy A in year six (when the S&P 500 lost 37%). In the end, Strategy B beats Strategy A.
Even if Strategy A was able to beat the market in 2008, that could have been accomplished with a loss of 36% (since the S&P lost 37%). Since none of us would be happy with a "market-beating" loss of 36%, beating the market can be an extremely flawed standard for a calendar year. As hypothetical Strategy B shows, consistent returns over time beat glamorous bull market returns paired with inevitable bear market losses.
The same hypothetical illustration applies to the years leading up to and following the dot-com bust. Strategy A appears to be superior to principal-preservation-oriented Strategy B between 1996 and 1999. However, when the next inevitable bear market arrived in 2000, Strategy B eventually overtook Strategy A.
Important Disclosures: While the CCM Market Model is based on sound economic and investment principles, there is no guarantee any of the objectives, including limiting account drawdowns and/or producing more consistent returns, will be met in the future. The terms odds and probabilities also speak to uncertain outcomes. Please see additional disclosures for more information.