Robust or Bust?

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By Michael McDaniel, Chief Investment Officer

This week the US Federal Reserve voted unanimously to raise the Federal Funds Rate by 25 basis points.

Leading up to the decision, conventional wisdom was nearly unanimous. Journalists, economists, advisors and pontificators of all stripes expressed confidence that domestic bond yields, the US Dollar and equity markets would rise, while bond values and precious metals would crash.

Such conventional wisdom is based on things like past correlations, which some folks who claim to be able to “crash test” portfolios try to weave together to establish what complex events will do to complex and oft-unrelated asset classes.

We’ve taken a different approach with Riskalyze. Our objective approach to analyzing risk respects the fact that the market is an overwhelmingly complex and interconnected system. We don’t try to guess whether individual securities will rise or fall; we assess 95% probabilities of broad portfolio risk and return.

Riskalyze doesn’t purport to know what a given news event will mean for every market, asset class, sector or security. Instead, we arm advisors with a solution to convert their outlook on the markets into a comprehensive analysis of a portfolio’s risk — making the results truly actionable.

The market, and the math of risk, simply doesn’t care about conventional wisdom. An advisor heading into this week’s news cycle could have believed any of three possible outcomes for the US bond market: that it would head higher, head lower, or be unchanged. It’s simple for an advisor to have the risk model reflect their opinions with a click or two. Immediately, that advisor has a powerful understanding of portfolio risk, and can stress test various real-world market scenarios.

Weeks like this, where the market deviates from conventional wisdom, highlight the superiority of broad-based portfolio risk analysis vs. speculative crash testing that incorporates consensus views or strong historical bias.

Whether you believe the sky is blue or falling, the Risk Number is a powerful way to illustrate the efforts you’re making to protect your clients from downside risk. If we can help you do that more effectively, please let us know — we’d love to help.