Archive · 20 Jan 2026
Sequence of Returns Affects Investment Outcomes Significantly
Imagine two investors who both earn an average return of 10% over four years.
Investor A has good years first, while Investor B has bad years first.
Even though their average returns are the same, the order of returns affects their final portfolio value.
This is called sequence of returns risk.
It's especially important when you're adding money to your investments or taking money out, like during retirement.
If you have bad years when you're taking money out, your portfolio can shrink faster.
To manage this risk, you can diversify your investments and have a plan for withdrawals.
For example, using a systematic investment plan (SIP) can help by buying more units when prices are low.
Near retirement, reducing equity exposure and keeping some cash or debt can protect against early market downturns.
Sequence of returns risk can significantly impact final portfolio value, even with the same average return.
This risk is more relevant during periods of contributions or withdrawals, such as retirement.
Example: Two investors with the same average return but different sequences of returns end up with different portfolio values.
Systematic Investment Plans (SIPs) help mitigate this risk during the accumulation phase by averaging the cost of investments.
During the withdrawal phase, early market declines can accelerate capital erosion, impacting retirement funds.
- Who
- Investors, particularly those in accumulation or withdrawal phases.
- What
- Sequence of returns risk affecting investment outcomes.
- When
- During periods of contributions or withdrawals, especially in retirement.
- Where
- Applicable to all investment markets, particularly equity markets.
- Why
- Because the timing of returns can significantly impact the final portfolio value, even with the same average return.
- Sequence of Returns Risk
- Risk that the order of investment returns affects final portfolio value, especially during contributions or withdrawals.
- Impact on Investments
- Different sequences of returns can lead to varying final portfolio values, even with the same average return.
- Example Investors
- Investor A: +20%, +15%, –10%, –5%. Investor B: –10%, –5%, +20%, +15%.
- Systematic Investment Plan (SIP)
- Investing a fixed amount regularly to mitigate sequence risk by averaging the cost of investments.
- Withdrawal Phase Risk
- Early market declines during withdrawals can accelerate capital erosion, impacting retirement funds.
- Mitigation Strategies
- Diversification, asset allocation, and maintaining a cash/debt buffer to manage sequence risk.