Investor Corner/Building and judging a portfolio/Portfolio Construction & Behaviour
3.1.10 Sequence of Returns Risk
Sequence of returns risk describes how the specific order of investment returns, not just their long-run average, can dramatically affect an outcome, particularly for anyone actively withdrawing money near or during retirement.
Why order matters, not just the average
Two portfolios can experience the exact same set of annual returns over twenty years, just in a different order, and end up in meaningfully different places if withdrawals are being made along the way. Poor returns that happen to arrive early in the withdrawal period force selling more units at depressed prices, permanently reducing the capital base available to recover when returns eventually improve.
Why this mainly affects the withdrawal phase
During the accumulation phase, when money is only being added and not withdrawn, the specific order of returns matters far less; a bad early year followed by strong later years still ends in roughly the same place as the reverse order, because no units were being sold into that early weakness. Once regular withdrawals begin, order suddenly matters a great deal, because withdrawals during a downturn lock in losses on the units sold.
Practical ways to manage it
Common approaches include holding a cash or short duration debt buffer covering a couple of years of withdrawals, so equity holdings are not forced to be sold during a downturn, and reducing the withdrawal rate temporarily during a market decline rather than withdrawing a fixed amount regardless of market conditions.
How PriLytics helps. PriLytics tracks your true asset allocation and goal progress together, helping you see whether a withdrawal-phase buffer is genuinely in place before you actually need it. See goals with guidance.