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Abstract
Sequence risk is a subtle risk factor retirement investment managers face that can hinder their plans for success. This paper illustrates the damaging effects that sequence risk can have on retirement plans and how asset volatility can exacerbate this risk. The study analyzes an asset-centric approach that utilizes low-volatility assets to mitigate sequence risk, as their diminished volatility implies more certainty for retirement plans. It further examines the return/risk profiles of four candidate low-volatility series, compares their performance either as stand-alone series or in the context of 60/40 portfolios with the traditional equity represented by the S&P 500 Index, and finally employs two sets of Monte-Carlo simulations to assess the effectiveness of such assets for the task of sequence risk mitigation. The study demonstrates that 60/40 portfolios with low-volatility components can significantly reduce the uncertainty of retirement investment outcomes in terms of both narrower final wealth ranges and reduced failure rates.
TOPICS: Retirement, portfolio construction, simulations, performance measurement
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