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Can Sustainable Withdrawal Rates Be Enhanced by Trend Following?

Clare, A. ORCID: 0000-0002-4180-6778, Seaton, J., Smith, P. N. and Thomas, S. H. (2019). Can Sustainable Withdrawal Rates Be Enhanced by Trend Following?. International Journal of Finance and Economics, doi: 10.1002/ijfe.1774

Abstract

We examine the consequences of alternative popular investment strategies for the decumulation of funds invested for retirement through a defined contribution pension scheme. We examine in detail the viability of specific ‘safe’ withdrawal rates including the ‘4%-rule’ of Bengen (1994). We find two powerful conclusions. First that smoothing the returns on individual assets by simple trend following techniques is a potent tool to enhance withdrawal rates. Second, we show that while diversification across asset classes does lead to higher withdrawal rates than simple equity/bond portfolios, “smoothing” returns in itself is far more powerful a tool for raising withdrawal rates. In fact, smoothing the popular equity/bond portfolios (such as the 60/40 portfolio) is in itself an excellent and simple solution to constructing a retirement portfolio. Alternatively, trend following enables portfolios to contain more risky assets, and the greater upside they offer, for the same level of overall risk compared to standard portfolios.

Publication Type: Article
Additional Information: This is the peer reviewed version of the following article: Clare, A. , Seaton, J., Smith, P. N. and Thomas, S. H. (2019). Can Sustainable Withdrawal Rates Be Enhanced by Trend Following?. International Journal of Finance and Economics, which has been published in final form at https://onlinelibrary.wiley.com/journal/10.1002/ijfe.1774. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
Publisher Keywords: Sequence Risk; Perfect Withdrawal Rate; Decumulation; Trend Following
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: https://openaccess.city.ac.uk/id/eprint/23062
[img] Text - Accepted Version
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