Tag Archives: returns

Sequence of returns risk, what is it and how to manage it?

Sequence of returns risk can certainly be a retirees worst nightmare. Completely out of your control, and at the whims of the market.

 

To recap: sequence of returns risk is a portfolio risk that is based on the order of your returns, rather than your average return when in the decumulation phase of your investment strategy. You see, if you aren’t withdrawing, the order of your returns makes no difference, but if you are withdrawing the order of your returns makes a massive difference.

 

Let’s look at 4 simple examples. Each portfolio with $100,000 and averages 4.75% over the three yer period. The first will have no withdrawals and have bad returns first, the second will have no withdrawals and have good returns first. The third will have bad returns first with $10,000 per year withdrawn at the end of each year. The fourth will have good returns first with $10,000 per year withdrawn at the end of each year.

 No Withdrawals, Bad Returns First:

 

Table showing returns over the years

 

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