Time Is Of The Essence: The Pitfalls Of Sequence Risk

- Paul Leonard

Over the long term, the asset class that is able to yield the best return is equities. As a result, most living annuities include equities in the portfolio in order to outperform inflation. However, this exposes the portfolio to the risk of short-term volatility, which causes a problem that needs to be managed. Here’s how.

It is well known that successfully timing the market (buying and selling to take advantage of short-term market movements) over the long term is not possible. “Time in” the market is therefore more important than “timing” the market. However, “time in” means riding through the inevitable market ups and downs, which causes a problem for retirees who are drawing income from their capital.

Let’s say that a portfolio aims at a return of inflation +4% over the long term. The ride towards that +4% return will be bumpy, meaning that the portfolio will experience ups and downs. And the timing of those ups and downs can create a problem for a retiree, especially if the negative returns come in the early part of the investment period.