Can Sustainable Withdrawal Rates Be Enhanced by Trend Following?

Clare, Andrew; Seaton, James; Smith, Peter N.; Thomas, Steve

doi:10.2139/ssrn.3019089

Cited by 2 publications

(3 citation statements)

References 29 publications

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“…A third possibility and one with a growing following involves 'smoothing' returns by the use of trend following techniques which switch the portfolio between risky assets and the risk free using some simple systematic time series momentum rule, (see Israelov (2017)). This is explored further in a series of research papers by Clare et al (2017Clare et al ( , 2019Clare et al ( , 2020 where a concept directly related to withdrawal possibilities from an accumulated pot of savings (known as the Perfect Withdrawal Rate (PWR), Suarez et al, 2015) is strongly linked to the large drawdowns which some investment strategies experience (e.g. the 50/50 equity/bond portfolio of Bengen, 1994).…”

Section: Figure 1amentioning

confidence: 99%

“…This is the effect of Sequence Risk in action and is not obviously related to volatility except indirectly. This concept for the example of US equity retirement portfolios since 1870 is explored in Clare et al (2020). Ezra et al (2009, p 86) offer a simple example to illustrate how the sequential calendar timing of the poor return is crucial to the retirement experience of the individual.…”

Section: Sequence Risk and The Perfect Withdrawal Rate (Pwr) (I) Sequmentioning

confidence: 99%

“…We would have to express retirement solutions in terms of asset classes that have more extensive histories, say like the UK ones, which go back to 1971, to assess PWR probabilities (e.g. see Clare et al, 2020). These would then have to be populated with ETFs and/or funds that reflect the chosen asset class mix.…”

Section: (Ii) Further Investigation Of the Left Tailmentioning

confidence: 99%

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Measuring Sequence of Returns Risk

Clare¹,

Glover²,

Seaton³

et al. 2020

JOR

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We discuss the nature and importance of the concept of Sequence Risk, the risk that a bad return occurs at a particularly unfortunate time, such as around the point of maximum accumulation or the start of decumulation. This is especially relevant in the context of retirement savings, where the implications for withdrawal rates of a bad return can be particularly severe. We show how the popular 'glidepath' or target date savings' products are very exposed to such risk. Three different measures of Sequence Risk are proposed, each of which is intended to inform investors of the probability that a chosen investment strategy may not deliver desired withdrawal rates and hence these measures are intended to aid investment choices; conventional performance measures such as Sharpe or Sortino ratios are only indirectly related to this ability to achieve a given withdrawal experience. Finally, we note that, using US data, very simple portfolios comprising equities and bonds can achieve very low probabilities of failure to achieve popular desired withdrawal rates such as 5% p.a. providing the equity component is 'smoothed' by switching in and out of cash using a simple trend following rule.

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Section: Figure 1amentioning

confidence: 99%

Section: Sequence Risk and The Perfect Withdrawal Rate (Pwr) (I) Sequmentioning

confidence: 99%

Section: (Ii) Further Investigation Of the Left Tailmentioning

confidence: 99%

See 1 more Smart Citation

Measuring Sequence of Returns Risk

Clare¹,

Glover²,

Seaton³

et al. 2020

JOR

Self Cite

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Absolute Momentum, Sustainable Withdrawal Rates and Glidepath Investing in US Retirement Portfolios from 1925

et al. 2019

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A significant part of the development in pension provision in many countries is the emergence of 'Target Date Funds' or TDFs. In this paper we examine the proposition of de-risking through life and the guidance offered by TDFs in the decumulation phase following retirement. We investigate the withdrawal experience associated with Glidepath Investing in the US since 1925 for conventional bond-equity portfolios. We find one very powerful conclusion: that smoothing the returns on individual assets by simple absolute momentum or trend following techniques is a potent tool to enhance withdrawal rates, often by as much as 50% per annum! And, perhaps of even greater social relevance is that it removes the 'left-tail' of unfortunate withdrawal rate experiences, i.e. the bad luck of a poor sequence of returns early in decumulation. We show that diversifying assets over time by switching between an asset and cash in a systematic way is potentially more important for the retirement income experience than diversifying one's portfolio across asset classes. We also show that Glidepath investing is only sensible within a few years of the target date. This finding provides succour to enthusiasts for target date investing in the face of the growing hostility in the literature.

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Can Sustainable Withdrawal Rates Be Enhanced by Trend Following?

Cited by 2 publications

References 29 publications

Measuring Sequence of Returns Risk

Measuring Sequence of Returns Risk

Absolute Momentum, Sustainable Withdrawal Rates and Glidepath Investing in US Retirement Portfolios from 1925

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