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, forcing you to sell assets at low prices and permanently shrinking what's left to recover. It's the reason retirees often hold a few years of spending in safer assets — a buffer so a crash early in retirement doesn't have to be sold into.

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.

Sequence-of-returns risk is taught hands-on in Stage 3 — Know Yourself: Risk Tolerance & Time Horizons.

See the lesson →

Related terms

Allocation driftThe slow movement of your portfolio away from its target mix as market values change.Asset allocationThe mix of stocks, bonds, and cash in a portfolio, expressed as percentages.Bear marketA prolonged market decline, conventionally defined as 20%+ from recent highs.DrawdownThe peak-to-trough fall in an investment's value before it recovers.
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