Order of returns matters, not just average returns
Sequence-of-returns risk refers to the order in which investment returns occur. Two portfolios with identical 30-year average returns can produce vastly different outcomes depending on whether the early years are strong or weak.
A retiree taking withdrawals during a market decline sells stocks at depressed prices to fund living expenses, locking in losses and reducing the principal available to recover when markets rebound.
Early losses amplify late-stage impact
A 50% market drop in year one of a 30-year retirement can be permanent damage even if markets gain 10% annually for the next 29 years. The smaller principal compounds more slowly. In contrast, a 50% drop in year 29 hurts less because there's limited time left to experience gains.
Defenses include maintaining a bond bucket for near-term spending, starting with a conservative withdrawal rate, and being flexible with withdrawals in down market years.