Andrew Clare: Dealing with the devil of sequence risk

Bring up the subject of sequence risk in any university finance department and you will probably be met with blank stares but, of course, financial advisers know all too well how important this risk is. It refers to the order in which returns occur over time. The existence of sequence risk also means that accident of birth can have a big impact on an investor's experience. Consider Chart 1 below. Mr Unlucky retires in December 1999, with a pension pot of £500,000, and starts to draw a regular pension of £25,000 from a typical UK equity and bond investment portfolio, represented here b...