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Reducing sequence risk using trend following and the CAPE ratio

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


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.

Publication Type: Article
Additional Information: This is the author accepted version. The final version is published in Financial Analysts Journal 9
Publisher Keywords: Sequence Risk; Perfect Withdrawal Rate; Decumulation; Trend Following; CAPE
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Departments: Cass Business School > Finance
Text - Accepted Version
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