sequence of returns

Example

“A 40% market drop in year one of retirement devastated her portfolio despite good average returns over 30 years.”

Memory Tip

ORDER MATTERS — two people with identical average returns but different sequences have very different outcomes.

Why It Matters

The sequence of returns matters because a portfolio that experiences poor returns early on may never fully recover, even if later returns are strong. This is especially critical for people in early retirement who are withdrawing money, as losses during downturns force them to sell assets at depressed prices, reducing their recovery potential.

Common Misconception

Many people assume that only the average annual return matters for their long-term wealth. They believe that earning 7 percent average returns will produce the same outcome regardless of whether those returns come early or late, when in reality the order and timing of returns significantly impacts final portfolio value.

In Practice

Consider two investors who each experience the same 10-year average return of 5 percent annually. Investor A gets negative 20 percent in year one, then 8 percent annually for nine years. Investor B gets 8 percent annually for nine years, then negative 20 percent in year ten. Despite identical average returns, Investor A ends with substantially less money because their early loss forced them to recover from a smaller base, while Investor B could ride out the final year loss from a much larger portfolio.

Etymology

Modern retirement risk concept — the timing of returns matters as much as the average.

Common Misspellings

Related Terms

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