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risk matrix

Risk Matrix

Reducing losses for better long term returns

The Great Financial Crisis of 2008 wiped out savings, derailed many investment plans and resulted in years of financial devastation. As investors around the world struggled to recuperate their assets, we at GYC Financial Advisory were determined to find a way to soften such huge losses in future.

But how could this be done? 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 is the right time to buy? What about the right time to sell? Due to the unpredictability of the markets, your guess can literally be as good as ours.

That's why we decided instead to develop an objective, rules-based system that was based on actual market data and not human speculation. Instead of trying to forecast market movements, this tool would tell us what the market was like for investing right now. Markets go up 70% of the time. If we had a way to identify and thus limit losses during the other 30%, we would dramatically increase the probability of our investments performing well.

So, we started by focusing on 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 took these component signals, combined them with market breadth and momentum indicators, and our Risk Matrix was 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.

While we look at all its components individually, we also consolidated the Risk Matrix’s 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.

We tested our Risk Matrix in historical simulations over the last 36 years, encompassing various market scenarios and crises. The chart below 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).

(Click image to enlarge)

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.

What it does do is cut through the daily noise of investing and try to soften big losses during large market sell-offs, allowing us to significantly improve the probability of investment success.

So, when you invest with us, we will help you avoid having your hard-earned monies be badly impaired by a market crash – making it easier for you to stick to your long-term investment plans and reach your goals.


For media coverage on the GYC Risk Matrix, you can refer to the cover story "Cap the Downside for Upside Gains," featured in the 25 July 2016 issue of The Edge magazine.

You can also click here to learn 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 our portfolios can help you achieve your financial goals, feel free to schedule a complimentary 30 minute session with us at our office in Orchard Road:

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