CPPI Start To Invest

In our previous section, we demonstrated CPPI is best for short investment periods. Knowing this, we can design a strategy for beginning investors. If we can avoid big losses in the first year(s), new investors will not be as likely to give up on investing. For these investors we will change the parameter settings a little more. We will set the floor at 0.9. Since intrest rates are very low these days, we’ll set the safe rate at 0%. All other parameters remain the same. In the list below we show all the parameters.

  • Risky asset = S&P500 (SPY)
  • Safe rate = 0%
  • Floor = 90% of the previous peak
  • m = 6
  • Monthly rebalancing

If something is not completely clear, readers can always look back at our introduction to CPPI. There you can find a brief explanation of the CPPI strategy.

CCPI Start To Invest in one-year investment periods

The figures below show backtests for the CPPI-Start-To-Invest strategy in one-year periods, starting from January 1993.

Figure 1 Annualized Returns Start-To-Invest-strategy for 1-year investment periods
Figure 2 Annualized Volatility Start-To-Invest-strategy for 1-year investment periods
Figure 3 Maximum Drawdown Start-To-Invest-strategy for 1-year investment periods

CPPI Start-To-Invest: discussion of results

In figure 1 we see the average Annualized Return for these one-year periods is 4.9% for the CPPI-Start-To-Invest strategy; it is 10.3% for the S&P500. On the other hand, the lowest Annualized Return is -9,3% for the CPPI-Start-To-Invest strategy, while it is -40.1% for the S&P500.

To compare the CPPI Start-To-Invest strategy with the S&P500-buy-and-hold strategy we can define a risk/return rate as the maximum loss in these one-year periods divided by the average return. For the CPPI-Start-To-Invest strategy this risk/return rate is 1.9; for the S&P500 it is 4.3. Conversely the return/risk rate is 0.53 for the strategy versus 0.25 for S&P500.

So, although the average annualized return in one-year investment periods with the CPPI Start-To-Invest strategy is lower, the average return per unit of risk is more than two times higher than it is for S&P500. This makes the strategy a good choice for investors with a short investment horizon or for beginning investors.

Look for a safe asset with positive returns

We have to add one little warning. With a safe rate of 0% or lower, once you break the floor, 100% of the portfolio is in the safe asset. As long as the investor strictly follows the strategy, the portfolio can never get out of this situation anymore since there will be no positive return anymore. We did not see this in any of our 329 backtests, but theoretically it is possible. So investors using this strategy should actively look for a safe asset with positive return.