Work

Reducing Sequence Risk Using Trend Following and the CAPE Ratio

Year: 2017

Type: article

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 investors face—particularly those in the decumulation phase of their savings journey, typically over the period of retirement financed by a defined contribution pension scheme. Using US equity return data for 1872–2014, we show how this risk can be significantly reduced by applying trend-following investment strategies. We also show that knowing a valuation ratio, such as the cyclically adjusted price-to-earnings (CAPE) ratio, at the beginning of a decumulation period is useful for enhancing sustainable investment income.

Source: Financial Analysts Journal

DOI: 10.2469/faj.v73.n4.5

Authors: Andrew Clare, James Seaton, Peter N. Smith, Stephen Thomas

Institutions: City, University of London, City St George's, University of London, University of York

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2336636858

FWCI: 3.964

Cites: 22

Cited by: 22

Related to: 10