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Reducing Sequence Risk Using Trend Following and the CAPE Ratio

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  • Andrew Clare
  • James Seaton
  • Peter N. Smith
  • Stephen Thomas

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. Disclosure: The authors report no conflicts of interest. Editor’s Note Submitted 8 September 2016 Accepted 28 April 2017 by Stephen J. Brown

Suggested Citation

  • Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2017. "Reducing Sequence Risk Using Trend Following and the CAPE Ratio," Financial Analysts Journal, Taylor & Francis Journals, vol. 73(4), pages 91-103, October.
    • Handle: RePEc:taf:ufajxx:v:73:y:2017:i:4:p:91-103
    DOI: 10.2469/faj.v73.n4.5
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