The ‘diabolical’ threat of sequencing risk

The threat of sequencing risk is leaving retirees and pre-retirees in danger when there is a market collapse, according to Cor Capital. 

This was because, not only did they lose out during the collapse, their age meant there was minimal time for them to regain their losses, known as sequencing risk. 

It was particularly in the case in the recent crash as it followed a particularly long bull run for equities and investors had become complacent with receiving high returns. 

Tom Rachoff, director at fund management firm Cor Capital, said: “Sequencing risk represents the danger of experiencing poor investment performance at the worst time. While some investors have decades to ride out volatility and heavy capital losses, investors nearing and in retirement are not among them.  

“They need to pay greater attention to the risk of permanent capital loss and the sequence of returns while still attempting to maximise return.” 

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With superannuation funds being tilted towards growth assets and unlisted assets such as infrastructure, this sold off in a market downturn. This was the opposite of what investors had expected the funds would do as many believed their focus had been on capital protection. 

Rachoff said: “Many of these investors did not realise that they were ‘at risk,’ and were sitting on a rollercoaster ride through the sequencing risk zone, with a better-than-even chance of succumbing to human behaviour if markets got stressed. And they got very stressed. 

“Ideally the pre-retiree and retired investors would have a portfolio that can perform well in a bull market phase, but more importantly, work to protect capital within the extreme ‘risk off’ environments.”