Threats to Investment Success: Sequence of Returns Risk
One of the hardest truths to accept in life is that you can lose even if you make no mistakes. This is even more devastating if it affects your financial well-being and future. For those people nearing retirement or who are already retired, these challenges can literally mean the difference between a fulfilling life in retirement or constant worry. If your retirement funds run out due to a poor sequence of returns, what are you supposed to do?
What is sequence of returns risk?
It’s not just the average of your returns over time that matter, but the sequence in which they land. You can never be certain of when markets will draw down, and if they do at the start of your retirement it can be devastating. For example, a 20% drop can wipe out 30 years of gains. Even if markets recover 20%, an initial $500,000 balance would only increase back up to $480,000.
How your return sequence can impact your life
A run of bad returns can reduce the viability of you living through retirement without working, or even having the ability to retire at all. If your portfolio isn’t properly balanced, a market downturn can undo decades of hard work and sacrifice. The potential impact of this risk cannot be overstated: sequence of returns risk can undo everything you worked towards in investing in a retirement fund.
Understanding when you can and should draw from your retirement savings means understanding how the market is performing as your approach or kickoff your retirement. Drawing too early on your funds during a bear market could crash everything you’ve worked hard for, simply because you didn’t have parameters or personal rules in place to prevent you from poor timing.
Ways to protect against this risk
Market volatility is a very real thing. Overcoming this challenge is no small achievement. At JarredBunch, we champion the use of financial models as the foundation for your investing strategy, rather than traditional portfolio management theory. This helps us manage downside risks while capturing upturn opportunities.
It’s crucial to address your entire financial life including future and retirement goals. Removing emotion from the equation limits additional losses due to panicked selling and “FOMO-investing.” Remember, portfolios that practice “buy and hold” routinely outperform those who try to time the market with selling.
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