The
COVID-19 pandemic has led to dramatic falls in the value of people's pensions and other
forms of savings, sometimes of the order of 30-40%.This is especially disastrous
if that person is about to retire and is looking to make the money last 30 or
so years.Such falls in wealth occur relatively frequently: think 1987, 2002, 2009
and so on.
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
Following'.
