Portfolio Strategy Zooms In on Buffett's Market Tactics

"If a major storm hits and you have poor sequence of returns in the first few years of retirement, it can damage the ship and deplete supplies — making the rest of the journey precarious," Capizzi explained.

Traditional Merits and Drawbacks

Advisors have a variety of traditional approaches to address this proposition, Capizzi noted, and each has its merits and drawbacks.

Building bond ladders is one useful technique, for example. A properly constructed ladder can provide interest income at regular intervals, and that income is generated while the bond ladder helps minimize interest rate risk by holding the underlying bonds until maturity.

That said, the likelihood of future rate decreases poses challenges. Another issue is the high workload involved in reinvesting maturing bonds, and it's all too common to see advisors implement in inefficient or inconsistent methodology.

Bond ladders, further, can struggle to generate sufficient yield for longer retirements and lack growth potential to address longevity.

"Modern retirement strategies require a growth component, often involving equities, to combat extended retirement periods and inflationary pressures," Capizzi argued.

Bucket strategies also have merit when it comes to mitigating sequence risk. They do so by allocating funds across multiple time-horizon portfolios, ranging from highly liquid short-term buckets to longer-term investments.

Again, such an approach is effective against sequence risk and does provide a degree of growth, but this approach may also fall short for modern retirees.

Finally, annuities provide steady income while addressing sequence risk regardless of market conditions. However, they often fall short of longevity and inflation risks, Capizzi noted.

Growth-Oriented Complement

Capizzi argued that the DunhamDC approach offers an effective growth-oriented complement to the three traditional approaches.

"It accomplishes this by adjusting its equity exposure in a highly disciplined way, increasing it during market declines when stock prices are lower, and subsequently selling portions of its equity holdings during market upswings and price increases," Capizzi said. "In our view, this is the complete opposite of what most investment strategies do."

That is, many managers own heavier stock allocations when the market cycle hits its high, and fewer or no stocks when the cycle hits bottom. This approach may provide higher absolute returns in some fast-growth periods relative to what Dunham delivers, but it also leaves retirement investors exposed to untimely downswings.

In the end, Capizzi argued, the advisor's goal is not to eliminate risk entirely but to manage it to align with each client's circumstances and objectives.

(Photo: Bloomberg; Illustration: Chris Nicholls/ALM)