Investing term
What is Sequence-of-returns risk?
The danger that bad market years hit right when you start withdrawing — permanently damaging a portfolio.
Sequence-of-returns risk is the specific danger that poor market years strike just as you begin drawing down a portfolio — in the first years of retirement. Because you're now selling assets to fund spending, a crash forces you to sell more shares at low prices, permanently shrinking the base that has to recover.
The cruel part is that two retirees with the same average return can end up in completely different places purely because of when the bad years fell. A crash in year one, while withdrawing, can do lasting damage that the identical crash in year fifteen would not. It's the reason retirees often hold a few years of spending in safer assets — a buffer so an early downturn doesn't have to be sold into.
On a retirement portfolio with the same average return, a crash in year one — while you're withdrawing — leaves far less than the identical crash in year fifteen.
For example
A 30% drop in your first retirement year, while you're withdrawing income, can do lasting damage the same drop in year fifteen wouldn't.
Learn it by doing
That's Sequence-of-returns risk in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 3, Know Yourself: Risk Tolerance & Time Horizons).
Try the free lesson →Why it matters to you
Sequence-of-returns risk matters because it's the hidden flaw in planning around average returns near retirement. A plan that works on 'the market averages 7%' can still fail if the early years deliver a crash while you're withdrawing. It's why the years just before and after you stop working are the most fragile of your investing life — and why a cash cushion and flexible spending in down years are the standard defences.
⚠ Selling stocks into an early-retirement crash
The trap is being forced to sell shares at depressed prices to fund living expenses in a downturn that strikes early in retirement. Each sale locks in losses and shrinks the base that must recover. Holding a buffer of a few years' spending in cash or short-term bonds lets you draw from that instead, giving stocks time to recover before you sell them.