Investing term

What is Sequence of returns?

The order in which your returns arrive matters — big early losses hurt more than late ones.

Sequence of returns is the underappreciated fact that the order in which gains and losses arrive can matter as much as their average — especially once you're withdrawing money. Two portfolios can post the exact same average return over twenty years and end up worlds apart, purely because of when the good and bad years fell.

The reason is that withdrawals interact with losses. A crash early in retirement forces you to sell more shares at low prices to fund the same spending, permanently shrinking the base that must recover. While you're still saving and adding money, sequence matters far less — a early crash even lets you buy cheap. Near and into retirement, it matters enormously.

The order of returns matters
$0k$50k$100k$150kretire10 yrs20 yrscrash latecrash earlySame average return, both withdrawing — a crash early empties the portfolio a late one doesn't.

Two retirees average the same return over 20 years, but a crash early — while withdrawing — can empty a portfolio that a late crash never touches.

For example

Two retirees average the same 6% over 20 years, but the one who hit a crash in year one — while withdrawing — can run out of money the other never does.

Learn it by doing

That's Sequence of returns in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 2, Why Investing Matters (And When It Doesn't)).

Try the free lesson →

Why it matters to you

Sequence-of-returns risk matters because it means the average return you plan around can be dangerously misleading near retirement. The years just before and after you stop working are the most fragile: a bad sequence then can derail a plan that looked fine on paper. It's the reason retirees hold more bonds and cash, keep a spending cushion, and stay flexible about withdrawals in down years.

⚠ Planning on the average and ignoring the order

A retirement plan built on 'the market averages 7%' can fail if the early years deliver a crash while you're drawing income, even if the long-run average holds. Averages hide sequence risk. Near retirement, plan for a bad early sequence — with a cash buffer and flexible withdrawals — rather than assuming the smooth average.

Frequently asked questions

What is sequence-of-returns risk?

It's the risk that the order of investment returns — not just their average — hurts you, particularly when you're withdrawing money. Poor returns early in retirement force you to sell assets at low prices to fund spending, permanently damaging the portfolio even if later returns are strong.

Why does the order of returns matter?

Because withdrawals magnify early losses. Selling shares to fund spending during an early crash shrinks the base that must later recover, so the same average return produces a much worse outcome than if the crash had come late. Without withdrawals, order barely matters — the average is what counts.

How do you protect against sequence risk?

Hold more bonds and cash as you approach retirement, keep a spending buffer so you needn't sell stocks in a downturn, and stay flexible — trimming withdrawals in bad years. These steps reduce the need to sell into an early crash, which is what makes a bad sequence so damaging.

Related terms

Asset classA broad category of investment with similar behavior. Stocks, bonds, cash, real estate, commodities.Behavior gapThe difference between a fund's reported return and what its investors actually earned — usually worse.Dollar-cost averagingInvesting a fixed amount on a fixed schedule, regardless of market level.FOMO buyingFear of missing out — piling into something after it has already run, because everyone else seems to be winning.
← Back to the full glossary