Glossary / Behaviour

Sequence of returns risk

Sequence of returns risk is the danger that poor returns arriving early in retirement permanently damage a portfolio, because withdrawals during a fall sell more units and leave less to recover with.

Two retirees with identical average returns over thirty years can end with wildly different outcomes purely because of the order those returns arrived.

It is why the safe withdrawal rate is a rate rather than a share of the average return.

Where people get it wrong

Planning on averages. The average is fine. The order is what ruins people, and the order is unknowable in advance.

The framework behind it Sequence of returns risk sets out the rule, the arithmetic and where it breaks.

Read the framework

Related terms

Safe withdrawal rate A safe withdrawal rate is the percentage of a portfolio that can be withdrawn in the first year of retirement, then increased with inflation, with a high probability of the money outlasting the retiree. Volatility drag Volatility drag is the gap between the average annual return of an investment and the return an investor actually compounds, caused by losses reducing the base on which later gains are earned. Drawdown A drawdown is the fall from a portfolio's peak value to its trough, expressed as a percentage, and recovering from one requires a larger percentage gain than the loss because the gain is calculated on a smaller base.

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