Learn About Sequencing Risk
Sequencing Risk illustrates how the timing of losses can significantly affect your portfolio, and hence is a particularly relevant consideration for investors who are about to retire or are retired. Investors should structure their investments in a way that can help manage Sequencing Risk.
When matters
There is an adage that says: “It’s not about timing the market but the time in the market.” It couldn’t be more wrong. More importantly than individual wins and losses on trades, it is when one loses in the journey of wealth creation and at which stage of their professional life that matters a lot more. Many investors fail to consider when they may lose in the market. A similar amount of losses, taken early in one’s wealth creation journey versus later, can have a great impact on the amount that one would retire on when professional life ceases.
Sequencing Risk
Let’s take a look at this hidden risk called Sequencing Risk, which is the risk of losing a large chunk of one’s wealth due to the sequence or order of negative returns in a portfolio. It is not as much about the negative returns as it is about the timing that it happened. This is a risk for those nearing retirement or close to ceasing professional earning capacity.
This is due to the happenstance of three events at the same time:
- Peak portfolio value
- Significant drawdown or negative returns
- No further contribution to the Portfolio - and worse if adding the fourth element -
- starting to draw from the portfolio
These are the covalence of events happening at the wrong time creating the greatest impact (negatively) on the value of one’s wealth at retirement. Worst returns at the wrong time.
