Financially strategising for a safer retirement

In summary

Sequence risk could be described as being – all the right returns but not in the right order! It develops as an investment loss that occurs at just the wrong moment. This risk has been largely neglected by academics and is one of the greatest risks to a happy retirement.

Andrew Clare, Professor of Asset Management and Stephen Thomas, Professor of Finance from City’s Bayes Business School, have designed an investment strategy which mitigates some of the worst effects of sequence risk, thereby enhancing retirement income.

Their research has demonstrated that in certain environments, by applying ‘trend-following’ or by ‘smoothing’ investment returns, individuals could expect to withdraw around 50 per cent more per annum than if they adopted a more conventional approach to a retirement portfolio.

What did we explore and how?

In their research, Professor Clare and Professor Thomas looked at how retirees could protect their incomes by safeguarding against the worst aspects of sequence risk.

Applying strategies normally used by hedge funds, the researchers identified that by implementing a ‘trend following’ filter, retirees could ‘smooth’ their investment returns.

Using a concept known as the ‘perfect withdrawal rate’ the researchers were then able to gauge the level of withdrawals that could be expected from different retirement portfolios.

By smoothing returns, the study showed that financial strategies that mitigate against sequence risk experienced a maximum loss of around 10 per cent, compared to the more conventional, commercially available solutions that experienced a loss of 50 per cent.

Benefits and influence of this research

The work undertaken by the researchers represents a dramatic change in how we assess the suitability of portfolios designed for the building of wealth (accumulation) and the sustaining of wealth (decumulation).

The strategy was met with interest from the financial industry and has been implemented by four retail investment funds. The research has also been presented at numerous financial conferences and published in a sector leading journal with the Chartered Financial Analyst Institute.

WM Management company has implemented the research, with over £25 million under management, which offers retirement investment solutions to Independent Financial Advisors (IFAs) and others.

The VT PEF Global Multi-Asset Fund offered by Plain English Finance is also built on the research, highlighting the importance of trend following in their prospectus.

Both Professor Clare and Professor Thomas are working with industry experts to develop a simple web-based tool to make the results of the research available to all and take the project into the international market.