Reducing sequence risk using trend following and the CAPE ratio

Clare, A., Thomas, S., Smith, P. N. & Seaton, J. (2017). Reducing sequence risk using trend following and the CAPE ratio. Financial Analysts Journal, doi: 10.2469/faj.v73.n4.5

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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 faced by investors, in particular those in the decumulation phase of their savings journey, typically over the period of retirement financed by a defined contributions pension scheme. Using US equity return data from 1872-2014 we show how this risk can be significantly reduced by applying trend-following investment strategies. We also demonstrate that knowledge of a valuation ratio such as the CAPE ratio at the beginning of a decumulation period is useful for enhancing sustainable investment income.

Item Type: Article
Additional Information: This is the author accepted version. The final version is published in Financial Analysts Journal 9https://doi.org/10.2469/faj.v73.n4.5).
Uncontrolled Keywords: Sequence Risk; Perfect Withdrawal Rate; Decumulation; Trend Following; CAPE
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/17447

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