Crazy Hot Market Matrix

15 April 2016

Tony Simmons , Consultant, Private Wealth |

Forget detailed market analysis, Bulls and Bears, negative articles in business journals and terminal media analysis of Australian and Global Equity Markets!

All you really need is to refer to the Crazy Hot Market Matrix (“The Matrix”) and all your investment decisions will be resolved!

Risk VS Return Matrix

The Matrix is presented as above.

The Vertical Axis represents market risk. It is rated one to ten. The Horizontal Axis represents return and is also rated one to ten. Essentially the more risk you take the higher the returns become. The standard risk/return paradigm is represented by the black line at 45 degrees starting at zero and zero. Sound familiar?

Ok so the matrix is divided into a number of zones.

The first Zone is the Falling Knife Zone or better known by its full name the “Catching the Falling Knife Zone”. This Zone is represented by equity investments you should definitely stay away from. Typically the Zone is crowded by Material and Energy stocks that have seen better days. Investors who dabble in this Zone continuously buy shares in this sector as the price of the share falls. They think that by averaging down their cost in this way they will make a huge profit when the sell the shares at time when the market price goes back to what is was in better and vastly different stages of the global economic cycle. Unfortunately this turnaround never happens and the investor suffers terminal cyclical risk. Their activity is characterised by what happens to them when they catch a falling knife. They get badly hurt.

Do not go into this zone. Only Crazy people go in this Zone. This is a Crazy Zone.

The second Zone is the Safe Zone. Investors in this Zone often invest in some fairly unspectacular and very unexciting instruments that have bad income returns and the capital value of these investments whittle away with inflation ( providing you live in a country that has inflation).

The investments that inhabit this Zone are Government Guaranteed Term Deposits, Cash, Government Bonds and AAA Corporate Bonds. It is not a good place to be all the time but an occasional visit can provide some capital certainty and certainly blends well with the Reliable Zone ( To be explained). This Zone is definitely not a Hot Zone. However to be in this Zone all the time is definitely Crazy.

The Third Zone is the One Night Stand Zone. This Zone is all about timing and short term excitement. If you stay in this Zone too long you take the risk of your investments falling into the Falling Knife Zone and the investor experiences years of investment purgatory. Investments in this category is all about having some fun watching your small cap investments spiral upwards and out of control in just a few short trading sessions. Make a quick buck and then sell them before the market price falls and you are stuck with them forever! This is a Hot Zone.

The Fourth Zone is a bit like The One Night Stand Zone and I call it the Unfaithful Zone. In this Zone you have overweight positions in hybrids, insurance companies and property trusts hoping one day they will go well and provide a decent return. It is called the unfaithful Zone because you know you shouldn’t be doing it but you are doing it anyway. You are being unfaithful to good reason more than anything else. This is a Hot and Crazy Zone.

The Fifth Zone is the Reliable Zone. Reliable because the investments you make in this Zone are in businesses that provide regular dividend income or are investments managed by Fund Managers that know what they are doing. Companies in this Zone are represented by Banks, Consumer Staples, Telcos and Large IT Companies. An investment in this Zone will also feature Absolute Return strategies that also incorporate some of the Safe Zone features.

Critics of this Zone will label you “So Conservative” if you invest in this Zone but don’t worry you will be ones smiling in the end. Stay in this Zone as long as possible.

The Final Zone is the Unicorn Zone. As you know Unicorns don’t exist. This Zone features investments that are promoted to have high returns with no risk. It is called the Unicorn Zone for this reason.

Don’t be tempted by the Unicorn. There is no success here because nothing exists in this Zone. Crazy Zone for sure!

Of course as you go through your investment life your investment strategy will be full of ventures into each Zone. My preference is to incorporate investment features of the Reliable Zone depending on your age, years to retirement and risk profile.

The answer to long term investment success is to find an advisor that will help you avoid the Hot and Crazy Zones and steer you onto the Reliable Zone.