The word ‘volatility’ has been mentioned a lot over the last couple of years. If you were chatting to friends or family about financial markets recently, the conversation probably included plenty of talk of ‘volatility’. One term that probably wasn’t mentioned was sequencing risk. Combining volatility and sequencing risk can lead to unfavourable outcomes for investors.
Sequencing risk, or “sequence of returns risk”, refers to the potential impact of the order in which returns are received on the overall performance of an investment portfolio. When markets fluctuate more widely, the timing and order of returns are of more concern, particularly for investors who have liquidity needs from their portfolios.
There are several ways to help mitigate sequencing risk when constructing portfolios. A portfolio that smooths the return and takes a lower risk approach is supreme. Diversification is key, though this is easier said than done. A well-diversified portfolio going forward will not be the same as it has been in the past, tighter liquidity conditions will cause asset prices to deviate. Asset return expectations need to be scrutinised carefully. A portfolio that focuses on managing risk, rather than avoiding risk, will be important in building and preserving capital, especially if market sell offs are larger and more frequent.
Read the full article on interest.co.nz
Research IP believes sequencing risk impacts several areas in portfolio construction:
- Asset allocation
- Rebalancing
- Portfolio holding changes, and
- Redemptions, either in lump sum and/or regular monthly/quarterly formats.
We will explore the points above in more detail in separate articles. In the meantime, if you would like to understand risk and how it impacts investment portfolio construction, please reach out for a free desktop review to highlight key risk areas based on your portfolios.
Where to from here?
Research IP currently has over 300 reports for managed funds available in the New Zealand market, as well as a range also available in Australia. The initial coverage also includes all default, balanced and growth KiwiSaver offerings. Coverage of funds and data points is expanding daily.
- The RIPPL Effect reports are also available on interest.co.nz
- You can find our research embedded at the point of sale on the new investment platform Flint Wealth.
- We announced a new partnership for Research IP in New Zealand with interest.co.nz at The RIPPL Effect – The future starts here – Research IP (research-ip.com)
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Research IP delivers high quality investment fund research and consultancy services to financial advisers, charities & NFPs and the broader financial services industry. Our experience spans well over 20 years working directly across the multiple facets of finance, so we understand the key drivers and challenges for managers, as well as the impact for investors and the broader industry.
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