An Unconventional Strategy for Managing Sequencing Risk

If you think Sequencing Risk is that of a consideration of older investors, then you can't be more wrong. Starting early has the benefit of time working on your side, compounding returns and creating a larger buffer should volatility happen in later investment years. Besides, as Steven Covey famously said, “Begin with the end in mind”. Sequencing Risk needs to be managed and planned early to avoid Sequencing Risk towards retirement.

See Part 1 if you wish to learn why this is a risk to your investments and see Part 2 for a GFC example. In Part 3 of Sequencing Risk, we discuss the Strategies for overcoming Sequencing Risk.

This strategy involves dividing your investment assets into two "pots" with distinct investment objectives.

The Growth Asset Pot

Diagram 1: The Growth Asset Pot has no contribution or withdrawal in 12.5 years

As shown in Diagram 1, this is a capped contribution portfolio. Once funded, you don’t make further capital contributions into it and this is where capital gains are king. You would place growth assets like small caps, private equity investments, and startups, especially those with long duration or much further out liquidation events into the pot. It can be further turbocharged by gearing (if your risk profile and financial position justifies it). 

If managed well, this Growth pot can be utilised for interest deduction during working years and turned debt-free at retirement. The highly appreciated assets are in turn realised for capital gains tax-free (or low tax) after retirement. 

The Regular Investment Pot

Diagram 2: The Regular Investment Pot reveives 12 yearly $25k contributions totalling $300k to mitigate Sequencing Risk

This is as shown in Diagram 2 and is a portfolio that is structured to receive regular contributions, and invested normally according to the investor's risk profile.

Plan well, early, with the end in mind.