Managing Risk

It pays to not make dramatic shifts in the market, from all-in to all-out. That is when investors are prone to making big mistakes.

Instead, it is advisable to take smaller steps, gradually increasing exposure to growth stocks as a bull market strengthens and retreating when risk rises. This involves dialing risk exposure up and down rather than a single on/off switch.

On/Off Switch

We use two market indicators to determine our investment allocation over the market cycle. The first is used for market timing, and the second reflects market risk. Stock market valuation helps to decide whether to commit more funds to the market or withdraw to the sidelines.

Bull/Bear Market Indicator
Stock Market Value Indicator

You can find out more about our two indicators at the links below:

The two indicators overlap but don’t always coincide. Both typically display low values during a bear market, with the Bull/Bear indicator recovering first, at the start of a bull market.

The Market Cycle & Bull/Bear Market

Market Valuation usually recovers to a medium reading in the early stages of a bull market and may remain there for several years. The indicator typically rises in the final phase of a bull market, warning of high prices. A reversal will likely follow, heralded by a sharp fall on the Bull/Bear indicator.

The Market Cycle & Valuation

Conclusion

The higher the Market Valuation percentile, the higher the risk. This amplifies any warning from a deteriorating Bull/Bear market indicator.