GYC Risk Matrix
All financial forecasts are subjective, and even experts are prone to biases and emotions that can hinder their judgements. The GYC Risk Matrix is an objective, rules-based system that operates on immutable market data, unhindered by human speculation. Using the wealth of academic research done on financial stress indicators, we monitor historically proven warning signs that suggest impending market weakness, which in turn signal the increased likelihood of big equity losses. The Risk Matrix works via a combination of monitoring these component signals and market breadth and momentum indicators.
Risk Matrix Origins
The Great Financial Crisis of 2008 wiped out savings, derailed investment plans, and resulted in years of financial devastation. As investors around the world struggled to recuperate their assets, we were determined to find a way to soften such huge losses in future. As investors in our own strategies, we acutely felt the pain experienced our clients.
However, predicting the future is impossible. Trying to forecast whether prices will go up or down is ultimately just guesswork, and even financial experts are prone to biases and emotions that can hinder their judgements. When do you buy or sell? The unpredictability of the markets means that your guess can is as good as ours — something many people are not willing to admit.
So, GYC developed an objective, rules-based system that uses concrete market data, shying away from subjective human speculation. This Risk Matrix will not be used to forecast market movements, but instead tell us the current state of the market at any present moment. Markets go up 70% of the time. Being able to identify and thus limit losses during the other 30% would dramatically improve the outcome and performance of your investments.
Utilising the wealth of academic research that’s been done on financial stress indicators — warning signs that signal market weakness and thus an increased likelihood of big equity losses — we take take these component signals and combine them with market breadth and momentum indicators. The GYC Risk Matrix is born.
The Risk Matrix does not attempt to time the market. Instead, it continuously analyses present market conditions and alerts us when something is not right, letting us react quickly to make an informed decision for our investors’ portfolios.
Historical testing over 36 years
Whilst we look at all its components individually, we consolidate the daily output into a traffic light system to act as a simple guide for our portfolio management decisions.
Green means that the market is stable and you should stay invested, regardless of what economists and financial journalists are saying. Amber suggests caution, due to elevated risks. Red tells us that current financial stress is very high, and any sell-off could potentially turn into huge losses.
The Risk Matrix performs well in many different and varied market scenarios and crises. The chart shows how a hypothetical investment of $100k from 1981 to the present day would have performed if it adhered to the simple risk-reduction rules of the Risk Matrix (blue), vs. a traditional buy-and-hold strategy (orange). The Risk Matrix will be updated whenever a significant scientific development or discovery warrants its inclusion.
Cut through the noise
The Risk Matrix is not a magic bullet that ensures we will be able to spot every single market crisis in the future. It does not guarantee zero losses in a bear market, nor outperformance in a bull market.
It is designed to react to changes in the climate, not the weather. So, when you invest with us, we will help you avoid having your hard-earned money be badly impaired by a market crash – making it easier for you to reach your goals and significantly improve your probability of investment success.
In addition it helps cut through the daily noise and emotions of investing, making it easier for you to stick to your long-term goals.
For media coverage on the GYC Risk Matrix, you can refer to the cover story "Cap the Downside for Upside Gains" (PDF) featured in the 25 July 2016 issue of The Edge magazine.
You can also learn more about our investment philosophy, which is founded on the tenets of Evidence-Based Investing.
If you'd like to find out how more about the Risk Matrix and how we can help you achieve your financial goals, contact us for a complimentary, no-strings-attached session.