CA. Akhilesh Kumarcaakhilesh.in
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INVESTINGSequence-of-ReturnsRisk, ExplainedWithout the JargonReturn order only matters once you withdraw;hold 2–3 years cash and flex spending 10–15%.CA Akhilesh Kumar· caakhilesh.inCOMPOUND VS LINEAR GROWTHLINEARCOMPOUNDEDTIME →2–3 yearsCash buffer ofspending10–15%Spending cutin a bad year±5 yearsRiskiestwindow of alifeCOMPOUND VS LINEAR GROWTHLINEARCOMPOUNDEDTIME →Nº 46
Investing · 5 min read · Summary infographic ↓

Sequence-of-Returns Risk, Explained Without the Jargon

Two portfolios, identical average returns, wildly different outcomes. The order of the years matters enormously once you start withdrawing — and not at all before.

By CA Akhilesh Kumar ACA, Institute of Chartered Accountants of India (2022) · Gurgaon
InvestingFIRE

While you are contributing, a crash is a discount. Once you are withdrawing, the same crash is a permanent loss of shares you had to sell to eat. That asymmetry has a name, and it is the single most under-appreciated risk in retirement planning.

The demonstration

Take two investors, each starting with £1,000,000 and withdrawing £40,000 a year, adjusted for inflation. Give them exactly the same set of annual returns — just in opposite order.

Investor A: -15%, -10%,  +8%,  +8%,  +8% ...
Investor B:  +8%,  +8%,  +8%, -10%, -15% ...

Identical average. Identical set of years.
A sells shares into two down years at the start;
B sells into two up years and meets the losses
with a much larger base.

The arithmetic is unforgiving: a withdrawal taken during a drawdown removes a larger proportion of the portfolio, so there is less capital left to participate in the recovery. The loss compounds against you.

Why it does not apply while you are saving

The same mechanism runs in reverse during accumulation. Regular contributions into a falling market buy more units — the poor early years are an advantage, provided you keep contributing. This is why the standard advice ("stay invested") is genuinely right for a saver and genuinely incomplete for a retiree.

The riskiest window in a financial life is roughly the five years either side of the moment you stop earning.

The usual mitigations

  • A cash buffer. Two to three years of spending in short-duration assets, so a bad year does not force equity sales.
  • Flexible spending. The ability to cut discretionary spending by 10–15% in a bad year does more mathematical work than most asset allocation changes.
  • A rising equity glide path. Counter-intuitively, some research suggests starting retirement more conservative and increasing equity exposure over time reduces failure rates, precisely because it protects the vulnerable early window.
  • Any income at all. Part-time work in the first years covers a disproportionate share of sequence risk.

None of these increases expected return. They all reduce the variance of outcomes in the window where variance hurts most, which is a different and more valuable thing.

Educational content, not financial advice.

Summary

This piece, as an infographic

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INVESTINGSequence-of-Returns Risk, Explained Withoutthe JargonReturn order only matters once you withdraw; hold 2–3 years cash and flex spending 10–15%.Investor ABad years first-15%, -10%, then +8% a yearSells shares into two down years at startLess capital left to join the recoveryInvestor BGood years first+8%, +8%, +8%, then -10%, -15%Sells into two up yearsMeets the losses with a much larger baseKEY FIGURES2–3 yearsCash buffer of spending10–15%Spending cut in a bad year±5 yearsRiskiest window of a lifeTHE USUAL MITIGATIONS01A cash bufferTwo to three years of spending in short-duration assets02Flexible spendingCutting discretionary spend 10–15% in a bad year beats most allocation changes03Rising equity glide pathStart more conservative, add equity over time to protect the early window04Any income at allPart-time work in the first years covers a disproportionate share of the riskSAME YEARS, OPPOSITE ORDERInvestor A-15%Yr 1-10%Yr 28%Yr 38%Yr 48%Yr 5Investor B8%Yr 18%Yr 28%Yr 3-10%Yr 4-15%Yr 5COMPARISON SNAPSHOTVSWhat mattersWhile contributing, a crash is a discountWithdrawing in a drawdown removes a largershareRiskiest window: 5 years either side ofstoppingWhat people get wrong"Stay invested" is incomplete for a retireeMitigations reduce variance, not raise returnIgnoring the order because the average isfineEducational content, not financial advice.CA Akhilesh Kumarcaakhilesh.in

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