Sequence of Returns

Sequence of Returns

February 01, 2024

There are an infinite number of ways the S&P 500 could have any given Average Annual Return (“AAR”) over a ten-year period of time. For example, the S&P 500 could have the following hypothetical returns over a ten year period: 


Hypothetical Annual Return





















The AAR for this period of time would be 5.2%. If the S&P 500 achieved the same returns but in reverse order, would that be significant? In other words, does the sequence of returns matter? The short answer . . . it depends.

    Assume someone invested $100,000 into the S&P 500 at the beginning of this hypothetical time period and did not make any additions or withdrawals for the next ten years. Using the above returns (and not counting any expenses or dividends), that investor would have roughly $157,927 by the end of the time period. If the S&P 500 had gotten the same returns but in reverse order, that investor would have ended up with . . . the same amount of money.

    This changes, however, if the investor adds or withdraws money during this time period. For example, if the investor withdrew $5,000 at the end of each year, using the noted S&P 500 returns in the listed order, his or her investment would have had a value of roughly $105,583 at the end of that time period. If we reverse the order of returns, though, the account’s ending value becomes roughly $83,297 – a substantial difference. Why the change?

    When one sells shares in order to withdraw money, that reduces the number of shares remaining invested in the holding. If this occurs simultaneously with negative investment returns, not only does the portfolio balance drop, but there also are fewer shares remaining to participate in any subsequent recovery. On the other hand, if one sells shares to withdraw funds during market upswings, share values simultaneously increase due to market performance, and the investor can sell fewer shares to generate the same amount of money to withdraw. This, in turn, leaves a larger number of shares invested to participate in any continued market increases. Since withdrawals typically must take place during retirement to generate cash on which to live and since investors have no control over how the market performs at any given time, this risk – known as Sequence of Returns Risk – can be significant.

    So, what can you do to try to minimize this risk as you prepare for or enter into retirement? Having a sound distribution strategy in place as you near retirement can help. It also can be beneficial to diversify your assets so you can sell holdings that may not fluctuate in value as much as others when the more volatile assets are suffering a downturn. Similarly, incorporating other means to hedge and control volatility also can be beneficial. Regardless of which strategies you employ, however, being aware of Sequence of Returns Risk and having a plan in place to deal with it can be critical in allowing a retirement plan to succeed.