Sequence risk and bond tents

摘要

In this paper, we perform an analysis of sequence risk in a portfolio (defined here as the risk of a one-time 20% market loss from an enemy we call Mr. Market) with a Monte Carlo simulation of many different "fixed" lifetime returns. The worst possible case is if you have a market loss right at or near retirement (that is when you have the most money to lose). Interestingly, bonds are a poor hedge against this, unless of course you knew exactly when the loss was going to occur. Bonds can actually increase your probability of running out of money because of their poor return, at least with the assumptions that we have made. Taken in homeopathic amounts, bonds can limit the worst-case scenario, however.