Sequence of Returns Risk
The risk that poor early returns in retirement permanently damage a portfolio.
What is Sequence of Returns Risk?
For a portfolio being drawn down, the order of returns matters as much as the average. Bad years early, combined with withdrawals, sell more shares at low prices and can exhaust a portfolio that would have survived the same returns in a different order.
Sequence of Returns Risk: a worked example
Two retirees with identical 7% average returns can have wildly different outcomes if one's losses land in years one and two.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.