Reducing Sequence Risk Using Trend Following and the CAPE Ratio

Andrew Clare, James Seaton, Peter N. Smith, Stephen Thomas
2017 Financial analysts journal  
This is the accepted version of the paper. This version of the publication may differ from the final published version. Permanent repository link: http://openaccess.city.ac.uk/17447/ Link to published version: http://dx. 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 faced by investors, in particular those in the decumulation phase of their savings journey, typically over the period of
more » ... nt financed by a defined contributions pension scheme. Using US equity return data from 1872-2014 we show how this risk can be significantly reduced by applying trend-following investment strategies. We also demonstrate that knowledge of a valuation ratio such as the CAPE ratio at the beginning of a decumulation period is useful for enhancing sustainable investment income.
doi:10.2469/faj.v73.n4.5 fatcat:e3xi256kjzh7rbdluvghz6anoi