Reducing sequence risk using trend following and the CAPE ratio

Reducing sequence risk with adjusted price-to-earnings (CAPE) ratio.
  • 27 Septiembre 2017

Por Andrew Clare, James Seaton, Peter N. Smith y Stephen Thomas

Financial Analysts Journal, Volume 73 Number 4.


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.