Practical Applications of Measuring Sequence of Returns Risk

Abstract

In Measuring Sequence of Returns Risk from the Summer 2020 issue of The Journal of Retirement, authors Andrew Clare (of Cass Business School), Simon Glover (of ITI Group), James Seaton (of Solent Systematic Investment Strategies), Peter Smith (of the University of York), and Stephen Thomas(of Cass Business School) demonstrate that the timing–not just the amount–of investment returns can be vitally important to investors’ retirement income prospects. Major losses right around one’s retirement date are much more damaging than those that happen long before or after retirement. Popular investment vehicles like target-date funds (TDFs) have not protected against sequence risk, so investors need a different strategy.

The authors find that a simple stock/bond asset allocation combined with a trend-following strategy for the stock portion (switching assets between stocks and government bonds, based on current market trends) greatly reduces sequence risk and minimizes the chances that retirees will run out of money or need to withdraw less from savings each year. The authors also offer ways to measure how well different investment strategies protect against sequence risk.