Who’s afraid of sequencing risk?
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Hi Mike, thanks for that analysis, very interesting. I read RIT’s blog as well so I’ve seen his recent work in this area too.
I think sequencing risk is very real, especially as you say with higher drawdown rates and higher volatility portfolios.
However, there is a risk that these academic-type studies forget about the real world and the fact that an investor who saw their portfolio doing badly would probably reduce their drawdown rate, sell the family silver, or take some other kind of action to avoid running out of money.
Having said that, sequencing risk is still an important risk that needs to be flagged up in this post-annuity world.
Another way to reduce sequencing risk, other than just reducing the drawdown rate, is to focus on higher yielding investments and then only draw down the portfolio’s income.
A yield of 3% to 4% isn’t too hard to get these days, and a dividend income should, in the long run, grow in real terms. There is still risk from income volatility, but if the income has some “slack” in it, i.e. is perhaps 10% more than the investor needs, I think income volatility shouldn’t be too much of an issue.
John