Sequence Risk: Whoever Thought the ORDER of Investment Returns Matters? - Professor Steve Thomas
From Augustin Galatanu on May 14th, 2020
In this talk Professor Steve Thomas introduces the concept of Sequence Risk, the risk of a particularly bad return occurring at an especially bad time: for example, around the point you retire. This will impact the pension you can withdraw and the length of time you can sustain it. In other words the bad return plays a significant role in the retirement experience, a concept not acknowledged in conventional discussions of risk in investment strategy.
This is illustrated with the example of retiring in the year 2000 versus in 2003: we call this Mr Lucky (2003) and Mrs Unlucky (2000)..- the latter has a far better experience because in their early retirement years (2000-2003) they do not experience a big loss-Sequence Risk in action.
Can we take the luck out of the date one retires (or equally the date of one's birth) in terms of retirement experience?
Answer: Yes, use
a fund with an investment strategy which avoids big losses such as
2000-2003, and indeed that should be the aim of investing both before
and within the retirement years. In other words 'smooth' your returns to avoid
such extreme losses using well-known investing techniques such as 'Trend