Sequence of Return Risk

Sequence of Return Risk:

A critical, yet little known, variable in determining how long your money will last in retirement

Twin Investors

Riddle me this...two retirees with an identical nest egg, an identical investment rate of return and an identical distribution schedule.  One is broke is 20 years while the other has nearly doubled her money.  How is this possible? The answer is they have a different sequence of returns.  While their average return is identical, one experiences losses in her portfolio just as she retires while the other experiences losses only after continuing to build her nest egg in early retirement.  

The following chart outlines two seemingly identical situations, except for the sequence of annual returns. 

sequence of return risk chart

The returns for this data are the actual returns for the S&P 500 from 2000 - 2019 (source:  Slickcharts S&P 500 Returns).  For Investor B, the returns were merely inverted so the first year's returns were 2019, then 2018 and so on. 

What a remarkable contrast!  Even as a 25-year market veteran who has studied market history extensively, I was shocked to see how this data played out.  And I'm appalled at how rarely this information is properly conveyed to investment clients, if at all. 

This startling discovery brings up two questions:

  • Why is this information not ubiquitous in the financial services industry?
  • What do I do with this information?

The answer to the first question is pretty straight forward.  Wall Street loves volatility.  Volatility creates trading activity and opportunity for Wall Street to game retail accounts.  So it doesn't serve their best interest to educate the average retiree on just how dangerous volatility can be.  They desperately don’t want anyone, especially you vulnerable retiree, to know the following…Your investment returns in retirement are not constant, that you know, but the fact that this lack of consistency can wreak havoc on your retirement plans, you may not be as aware of.  The fact remains, if you absorb losses early in retirement, the odds that your assets will last your lifetime decline considerably. 

Second, Wall Street needs passive investors to do their bidding.  Closet index funds and separate accounts can be gamed to Wall Street’s own advantage.  This is where they park their bad trades, sell to when markets are going down and buy from when markets are rebounding.  And this is why 94% of all mutual funds underperform the market averages1.  Because Wall Street is gaming them for their own gain.  Despite promoting the “buy-and-hold” concept ad nauseam, Wall Street never takes the approach for themselves.  By taking a passive approach to investing, the investor is serving as Wall Street’s patsy.

So what to do with this information?

What makes this answer so difficult is that the prospects for most any type of investment outside of equities is so dire at this point.  CDs at 0.5%?  10-year Treasury bonds at 1% with a negative real return?  Where does one go?  Where does one achieve a respectable return outside of equity markets?

Our investment solution is specifically designed to mitigate the Sequence of Return Risk.  We start off with 2 major assumptions:

  1. Protect principle at all costs.  It is our Rule #1.  And it is based on the principle that it is easy to make up a 5% or 10% loss.  But recovering from a 40%+ loss becomes nearly insurmountable given the Law of Parabolic Proportions. 
  2. In every market, there is opportunity for gains.  Wall Street and the complicit media do a wonderful job of promoting FOMO (Fear of missing out).  But we know that slow and steady wins the race.  If we miss out on some gains today, we'll find new opportunities tomorrow. 

If you feel that you are susceptible to Sequence of Return Risk, we would appreciate the opportunity to show you how we have mitigated this risk with real-world examples of risk management at its best.  Simple fill out the form below and we'll contact you at our earliest availability. 



Contact us