Reducing Sequence Risk Using Trend Following and the CAPE Ratio

Andrew Clare, James Seaton, Peter Smith and Stephen Thomas

Financial Analysts Journal, 2017, vol. 73, issue 4, 91-103

Abstract: The risk of experiencing bad investment outcomes at the wrong time, or sequence risk, is a poorly understood but crucial aspect of the risk investors face—particularly those in the decumulation phase of their savings journey, typically over the period of retirement financed by a defined contribution pension scheme. Using US equity return data for 1872–2014, we show how this risk can be significantly reduced by applying trend-following investment strategies. We also show that knowing a valuation ratio, such as the cyclically adjusted price-to-earnings (CAPE) ratio, at the beginning of a decumulation period is useful for enhancing sustainable investment income. Disclosure: The authors report no conflicts of interest. Editor’s Note Submitted 8 September 2016 Accepted 28 April 2017 by Stephen J. Brown

Date: 2017
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DOI: 10.2469/faj.v73.n4.5

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