Gyrostat Capital Management: Why Advisers Must Scenario-Plan Both The Bubble And The Bust

The Blind Spot: Why Advisers Must Scenario-Plan Both The Bubble and The Bust

In financial markets, uncertainty is a constant. But in retirement portfolios, uncertainty carries asymmetrical consequences. A portfolio can recover from volatility; a retiree cannot recover from a major drawdown early in retirement. This is the essence of sequencing risk, and it is the most overlooked threat facing investors today.

Much of the current debate focuses on whether global equity markets are priced for perfection, or whether the extraordinary rally in AI-linked mega-caps has further to go. But this focus on prediction distracts from the more fundamental question: What are the consequences if we’re wrong?
This is the question advisers must answer, not because of forecasting skill, but because of stewardship responsibility.

Drawing on insights from thinkers such as Nassim Taleb and Daniel Kahneman, we are reminded that human decision-making is shaped more by consequences than probabilities, more by the asymmetry of loss than by the symmetry of potential gain. When consequences are catastrophic and irreversible, the rational course is preparation, not probability-weighing.

In retirement portfolios, this logic becomes unavoidable.

The Consequence That Cannot Be Ignored

A retiree who experiences a 20–40% drawdown early in retirement faces a mathematical and psychological burden that is difficult to overcome. Losses become locked into the compounding pathway. Withdrawals accelerate depletion. Even strong long-term returns cannot repair damage inflicted at the wrong time.

This is not a matter of opinion. It is path dependency, a structural feature of portfolio mathematics.

A working-age investor has decades for markets to recover. A retiree does not.
Therefore, the adviser’s obligation is not simply to participate in market growth, but to prevent irreversible loss at the most vulnerable stage of a client’s financial life.

If the consequences are this severe, then whatever one’s market outlook — bullish, neutral, or cautious — advisers have a responsibility to scenario-plan for adverse outcomes.

This is the point too often lost in the noise of forecasts:
Scenario planning is not a view; it is a stewardship responsibility.

The Traditional Trade-off: Sequencing Risk vs Longevity Risk

Advisers have long faced an uncomfortable dilemma. Protecting clients from sequencing risk typically meant lowering expected returns, increasing longevity risk. Boosting returns meant increasing drawdown exposure, heightening sequencing risk.

This trade-off forces advisers into what behavioural economists call a “regret-minimisation trap”: choosing which type of failure they are more willing to accept.

Neither outcome is satisfactory. Retirees cannot afford either:

• an early 30% drawdown
• or insufficient compounding later in life

The industry still implicitly accepts that advisers must choose between protection and growth.

But this trade-off is no longer necessary.

A New Solution: Eliminating the Trade-Off

At Gyrostat, we challenge the idea that sequencing risk protection must come at the cost of long-run return potential. Risk-managed investing is not merely downside defence, it is an approach that seeks to deliver stable return pathways across a wide range of market environments.

Our investment process operates on two core principles:

1. Structural Protection

We position portfolios to minimise vulnerability to large drawdowns, including environments marked by valuation extremes, liquidity tightening, or geopolitical fragility.

2. Compounding Efficiency

By avoiding severe drawdowns and maintaining smoother return paths, the portfolio improves its compounding profile, which directly addresses longevity risk.

The outcome is a philosophy aligned with reality rather than rigid theory:

Protect The Sequencing Window; Preserve Longevity Outcomes.
No trade-off required.

This is not hypothetical. Increasingly advisers and asset consultants have recognised this advantage, noting that Gyrostat’s approach significantly reduces the traditional tension between early-retirement protection and lifetime returns.

 

The Market Backdrop: Why Scenario Planning Cannot Wait

While the consequences argument stands on its own, the current market environment amplifies its urgency.

Recent research from GMO’s Global Strategist Letter[1] highlights that U.S. equity valuations today resemble those seen at the peak of the 2000 Internet Bubble. AI-linked mega-cap stocks are priced for near-perfect outcomes. Venture capital is allocating capital to AI startups with the same exuberance that characterised the late-1990s tech cycle. Meanwhile, quantum computing stocks have surged more than 1,200% in speculative bursts.

GMO’s Exhibit 4 shows the most troubling parallel: the current risk–reward relationship for U.S. large caps mirrors March 2000 almost exactly. At that peak, investors believed in a new paradigm. The subsequent 50–80% drawdowns were not merely uncomfortable; they permanently reshaped retiree outcomes.

The lesson is not that a bubble must burst.
The lesson is that if it does, portfolios relying on narrow leadership and elevated valuations are exposed to severe sequencing risk.

This is why scenario planning is essential. Not predicting the bubble.
Preparing for the consequences if it ends.

Fiduciary Duty in A World of Uncertainty

Advisers today face increasing responsibility not only for managing portfolios but also for guiding client behaviour in environments marked by structural change. When the potential consequences are irreversible, the adviser’s role shifts from forecaster to stewardship responsibility.

The question becomes:

If the cost of being wrong is catastrophic, what justification is there for not protecting retirees?

This is not alarmism. It is rational risk management grounded in behavioural science and decades of market history.

A Practical Framework For Advisers

To bring consequence-based scenario planning into an adviser’s workflow, consider three questions:

1. If markets fall 20–30% next year, which clients cannot recover, what is your protection plan?
2. Does your portfolio construction survive BOTH a continuation of the AI-driven rally AND a drawdown resembling the early 2000s?
3. If sequencing risk is irreversible, what process ensures clients are never exposed to catastrophic early-retirement losses?

These questions bring clarity. And clarity leads to better decisions.

 

Conclusion: Protecting Retirees is Not A View — It Is An Obligation

Markets will always fluctuate. Narratives will always shift. Forecasters will always disagree.

But consequences are stable.  Losses in retirement are irreversible. Sequencing risk cannot be undone. Longevity risk cannot be ignored.

Advisers must scenario-plan for both the bubble and the bust, not because they know which will occur, but because they cannot afford to be wrong.

In uncertain environments, the advisers who protect retirees win. Those who wait in an attempt to predict timing for protection often do so only when it is too late.

Risk-managed investing is not about prediction. It is about stewardship responsibility.

When responsibility aligns with process, outcomes improve, not by chance, but by design.

 

Gyrostat Capital Management prepared this document and it is intended only for Australian residents who are wholesale clients (as defined in the Corporations Act 2001). To the extent any part may be perceived as financial product advice, it is general advice only and has been prepared without taking into account of the reader’s investment objectives, financial situation or needs. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should consider the Product Disclosure Statement (PDS) relevant to the Fund before making any decision to acquire, continue to hold or dispose of units in the Fund. You should also consult a licensed financial adviser before making an investment decision in relation to the Fund. One Managed Investment Funds Limited ACN 117 400 987 AFSL 297042, is the responsible entity of the Fund but did not prepare the information contained in this document. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information in this document cannot be warranted or guaranteed.