Risk & returns
Sequence-of-returns risk is the effect of return order when money is added or withdrawn. The same average returns can produce different ending wealth when cash flows interact with losses.
Make it click
Two players receive the same gains and losses but must withdraw chips each round. Early losses leave fewer chips to recover, so order changes the final result.
Now put that into markets
Withdrawals during a drawdown force a larger share of the portfolio to be spent. Accumulators and decumulators can experience opposite sequence effects.
Arithmetic and geometric averages do not capture cash-flow timing. Simulations and historical paths explore ranges but depend on assumptions.
Model actual contributions or withdrawals, inflation, fees and rebalancing. Compare paths with the same return set in different orders.
A historical bad sequence is not a forecast and simulations can omit structural change. Mitigations trade against income, growth or flexibility.
Takeaway
