Sequence risk
Also called: sequence of returns risk
The danger that poor returns arrive early in retirement, when you are withdrawing rather than adding.
Two people can experience identical average returns over the same period and end up in very different places, depending on the order the good and bad years arrived.
While you are contributing, order barely matters — a fall early on simply means buying more cheaply. Once you are withdrawing, it matters a great deal, because a poor stretch early forces you to sell more units at low prices, and that damage does not undo itself.
It is the main argument for holding some stable money alongside investments once you are drawing on them: not because markets are dangerous, but because the timing of their bad years is not yours to choose.
Words on this page
- Risk — The chance that an outcome is permanently worse than you needed it to be.
- Market — All the buyers and sellers of an asset together — nobody sets the price from above.
Related terms
Covered properly in Learn.