Why Downside Protection Matters More in Retirement

The day an investor stops adding fresh savings and starts drawing an income, portfolio risk takes on a new dimension. Academic shorthand calls the key retirement threats the SMILE factors: sequencing, market, inflation, longevity and emotion. Of these, sequencing risk is the silent killer: a large drawdown in the early years of retirement can leave a permanent scar because the portfolio must fund withdrawals while it is still wounded.

Unfortunately, most investors reach retirement still holding beta-one, long-only equity portfolios whose fortunes rise and fall with the market. When salaries disappear, dollar-cost averaging disappears with them, leaving the retiree structurally fragile. The price of inaction is a permanent capital loss and a compromised lifestyle, which outweighs the effort required to build a sturdier allocation.

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