Building a portfolio
Sequence-of-returns risk
Also called Sequence risk
The risk that poor returns early in retirement do lasting damage, even if average returns are fine.
How it works
While you are contributing, the order of returns barely matters. Once you are withdrawing, it matters enormously: selling assets during an early decline removes capital that can never participate in the recovery.
Two retirees with identical average returns over thirty years can end up with wildly different outcomes purely because one met the bad years first.
Where it misleads people
Average return figures conceal this entirely. Planning on averages is exactly the mistake sequence risk describes.
Worked example
Two portfolios both average 6% over twenty years. The one that had its two worst years at the start, while withdrawing, can run out of money while the other still has a substantial balance.
Related terms
- Glide pathA plan to shift gradually from higher-risk to lower-risk assets as a target date approaches.
- Safe withdrawal rateThe percentage of a portfolio you can take each year with a high chance of it lasting your lifetime.
- DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
- Time horizonHow long until you need the money — the single fact that should shape most of your other decisions.
Mentioned in
More in Building a portfolio
- Strategic asset allocation
- Tactical asset allocation
- Risk tolerance
- Asset allocation
- Rebalancing band
- Concentration risk
- Rebalancing
- Core and satellite
All 20 Building a portfolio terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.