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Not investment advice. Educational reading. See Disclaimer.
L.12 · BEGINNER · 2 MIN

Sequence-of-Returns Risk

Two investors can earn the same AVERAGE return over 30 years and end up with very different amounts -- because the ORDER of returns matters once you are adding or withdrawing money. That is sequence-of-returns risk. It is usually discussed for retirees (a crash early in retirement, while withdrawing, can permanently shrink a portfolio), but it also shapes how much an early-career saver should worry about big early drops.

Quiz · 5 questions ↓
§ 01
SituationWhy the order matters
Early accumulation (small balance)A 40% drop on $5,000 is $2,000; you keep buying cheap -- order barely matters, and a crash is a gift
Late accumulation (large balance)A 40% drop on $500,000 is $200,000, with less time to recover before you need it
Early retirement (withdrawing)Selling into a crash locks in losses -- the most dangerous window
§ 02

For a young saver, sequence risk is mostly good news: early crashes let you buy years of cheap shares, and you have decades to recover. The risk grows as your balance grows and your horizon shrinks -- which is exactly why the glide path (fpb-4) shifts you toward bonds as you approach the date you will need the money.

§ 03
Notice your own reaction the next time the market drops 20%. If you are decades from needing the money, that drop is lowering the price of your future shares -- a feature, not a bug.
§ 04

You cannot control the sequence of returns, but you can control the two things that defang it: keep enough in bonds and cash as you near your goal, and never be a forced seller in a downturn. Sequence risk punishes forced sellers, not patient holders.

§ 05
Why is a market crash early in your career far less dangerous than one just before you need the money?
Five questions · AI feedback

Sit with the ideas.

What is sequence-of-returns risk?

Why:

Other lessons in this course.

  1. 01Asset Allocation by Time Horizon
  2. 02Stocks vs Bonds vs Cash: The Numbers
  3. 03The Three-Fund Portfolio
  4. 04Target-Date Funds and Glide Paths
  5. 05Opening a Brokerage Account
  6. 06Funding Your Account and Your First Buy
  7. 07Dollar-Cost Averaging vs Lump-Sum
  8. 08Rebalancing Rules: Calendar vs Threshold
  9. 09Asset Location: Which Account Holds What
  10. 10Tax-Loss Harvesting -- The Mechanics
  11. 11I-Bonds and TreasuryDirect
  12. 12Sequence-of-Returns Risk— reading now
  13. 13Equity Compensation as Concentrated Risk
  14. 14The 5 / 10 / 30-Year Checkup
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