Sequence-of-returns risk

The risk that the order in which returns happen, not just their average, damages an outcome - especially when money is being withdrawn along the way.

Example

Two investors with the identical average return over 20 years can end up with very different balances if one hits a downturn early and the other late, especially if either was withdrawing money at the time.

Important

This is why a shrinking time horizon, nearing retirement or a planned withdrawal, usually calls for reducing volatility, regardless of how good the average return has been so far.

Related terms

• Time horizon — How long before you plan to spend the money you are investing.
• Volatility — How much and how often an asset's price moves, up or down, over a given period.
• Drawdown — The decline from an investment's highest point to its lowest point before it recovers.

Lessons that explain it

• Early access is expensive, fees compound, and the rules can change — The main costs of retirement accounts are taxes and penalties on early withdrawal, fees inside the plan, and the risk that governments change contribution, withdrawal or tax rules. (11 min)
• Time horizon — The same investment is a completely different bet depending on when you'll need the money. This is the variable that decides almost everything else. (10 min)

All 578 terms in the Investing glossary