Investing for Retirement III: Understanding and Dealing With Sequence Risk

GMO

Ben Inker, James Montier, Martin Tarlie

Research

15 Pages

GMO argues sequence risk is not an asset class property but a cash flow problem that forces selling low or buying high. Using a retirement derby backtest from 1881 to 2018, it finds needs based, valuation sensitive allocations cut the odds of running out of money versus standard glidepaths. It also notes investors often trail their own funds by 1 to 2 points per year due to mistimed flows.

Date published: September 2022

Key Takeaways

Cash flow driven: Sequence risk appears when cash flows force trades, turning return order into real outcomes.
Shortfall based planning: Framing risk as meeting needs over time can guide glidepaths that reduce forced selling.
Valuation aware rebalancing: Buying cheaper assets and trimming expensive ones can improve outcomes, but is emotionally difficult.
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