Sequence of returns myth [Anyone affected by it?]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
AlohaBill
Posts: 765
Joined: Thu Jan 24, 2008 12:20 pm
Location: California

Sequence of returns myth [Anyone affected by it?]

Post by AlohaBill »

Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Sequence of returns myth

Post by HomerJ »

Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Sequence of returns myth

Post by dbr »

AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
I have been severely affected. Returns for a substantial portion of our early years of retirement have been so good that we have more money now than we could reasonably have anticipated. And those are real returns because inflation has been low. A 50/50 stock/bond allocation has worked well with the 2010-2020 stock runup and good returns in bonds.

And, as mentioned market declines have recovered strongly and quickly.

SORR is not about market crashes per se but about long secular bear markets and high inflation, a combination probably best illustrated for those retiring in the mid sixties. Someone retiring at age 60 in 1966 would be 115 years old today.
Last edited by dbr on Sun Oct 17, 2021 9:50 am, edited 1 time in total.
sailaway
Posts: 8215
Joined: Fri May 12, 2017 1:11 pm

Re: Sequence of returns myth

Post by sailaway »

HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
Wouldn't that be specific to US investors. Have other developed countries seen SORR in the last few decades?
User avatar
Nate79
Posts: 9373
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Sequence of returns myth

Post by Nate79 »

AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
What does your question have to do with your thread title? Are you implying it is a myth?
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Sequence of returns myth

Post by JoMoney »

The "Market Timer - A different approach to asset allocation" thread is an example of sequence of returns risk during the accumulation stage.
viewtopic.php?f=10&t=5934
If he had started his leveraged portfolio at some point after the 2008 global financial crisis, the results would not have been as severe as what happened starting just before it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Sequence of returns myth

Post by JoMoney »

Nate79 wrote: Sun Oct 17, 2021 9:47 am
AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
What does your question have to do with your thread title? Are you implying it is a myth?
It most certainly happens, maybe the stories of the catastrophic failures and "Black Swan Events" give them a mythological legendary aura ;) e.g. "When Genius Failed"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
typical.investor
Posts: 5263
Joined: Mon Jun 11, 2018 3:17 am

Re: Sequence of returns myth

Post by typical.investor »

HomerJ wrote: Sun Oct 17, 2021 9:42 am So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
People I know very well took early retirement late 1999 based on their advisor's suggestion that their portfolio was big enough relative to their spending. However, they had too much in risk assets (particularly high yield corporates I think), panicked and sold a fair amount. There wasn't agreement in that action but they laugh about it now.

Anyway, since they'd forgone a decent chunk of an expected pension to take early retirement, they quickly tightened their belts and one of them went back to work part-time. Things got back on track and they are happily enjoying retirement.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Sequence of returns myth

Post by Watty »

Sequence of returns myth
That should really read "Sequence of returns math". :D

We have been through a historic 12 year bull stock market since about 2009 with only a few blips. Stocks prices have more than quadrupled and interest rates and been generally falling since then so bonds have done very well since then.

Anyone who retired since 2009(like me) has likely done very well and greatly benefited from the sequence of returns. I retired in 2015 and my net worth is about the same now as when I retired despite have paid for 6 years of retirement. These have been some of my most expensive retirement years too since I have not started Social Security and I was not on Medicare.

That does not change the underlying math though and the sequence of returns risk is still out there and very real.

That said with you need to remember that the 4% safe withdrawal rate studies include the Great Depression, double digit inflation years, and several wars an the 4% safe withdrawal figure includes the sequence or returns risk that you might retire just before bad economic times.

I would assume that most retirees who went through the dot com crash and the financial crisis are still doing OK as long as they were spending within the 4% SWR guideline.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: Sequence of returns myth

Post by ResearchMed »

HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
[emphasis added]

Those who retired in, say, 2000 and 2008 would/could have "experienced a fairly quick recovery"... UNLESS they panicked and SOLD at relative lows. In that case, they would have had cash/etc., that did NOT "recover" as the market recovered.

That's why panic selling can be so bad. That locks in the losses, and eliminates the chance of any recovery that might occur.

RM
This signature is a placebo. You are in the control group.
sailaway
Posts: 8215
Joined: Fri May 12, 2017 1:11 pm

Re: Sequence of returns myth

Post by sailaway »

ResearchMed wrote: Sun Oct 17, 2021 10:21 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
[emphasis added]

Those who retired in, say, 2000 and 2008 would/could have "experienced a fairly quick recovery"... UNLESS they panicked and SOLD at relative lows. In that case, they would have had cash/etc., that did NOT "recover" as the market recovered.

That's why panic selling can be so bad. That locks in the losses, and eliminates the chance of any recovery that might occur.

RM
Sure, but if we take personal situations into account, SORR would also include a serious, expensive medical issue early on.

Or, of particular concern in 2008, boomerang kids increasing expenses.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: Sequence of returns myth

Post by ResearchMed »

sailaway wrote: Sun Oct 17, 2021 10:27 am
ResearchMed wrote: Sun Oct 17, 2021 10:21 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
[emphasis added]

Those who retired in, say, 2000 and 2008 would/could have "experienced a fairly quick recovery"... UNLESS they panicked and SOLD at relative lows. In that case, they would have had cash/etc., that did NOT "recover" as the market recovered.

That's why panic selling can be so bad. That locks in the losses, and eliminates the chance of any recovery that might occur.

RM
Sure, but if we take personal situations into account, SORR would also include a serious, expensive medical issue early on.

Or, of particular concern in 2008, boomerang kids increasing expenses.
Right.

However, panic selling at times like 2000 or 2008 isn't uncommon, or at least the temptation to do it. And it is a behavioral choice, difficult or not as it may be to avoid.

Having very high medical costs beyond insurance early in retirement usually isn't a choice...
... unless one goes nuts and in addition to that shiny new Lamborghini, one gets a ton (perhaps almost literally!? :twisted: ) of plastic surgery (perhaps including fat removal).

RM
This signature is a placebo. You are in the control group.
User avatar
David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Sequence of returns myth

Post by David Jay »

dbr wrote: Sun Oct 17, 2021 9:45 amI have been severely affected. Returns for a substantial portion of our early years of retirement have been so good that we have more money now than we could reasonably have anticipated.
Same here. Retired in January 2019 and expected to spend down a significant portion of our portfolio each year while delaying Social Security. Our portfolio balance after nearly 3 years is basically unchanged.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
Svensk Anga
Posts: 1612
Joined: Sun Dec 23, 2012 4:16 pm

Re: Sequence of returns myth

Post by Svensk Anga »

sailaway wrote: Sun Oct 17, 2021 9:46 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
Wouldn't that be specific to US investors. Have other developed countries seen SORR in the last few decades?
Japanese investors with home country bias and equity heavy portfolios would have experienced terrible SORR had they retired say late 1989. They could have gone through a whole 30-year retirement and not gotten back to their market's high. A lot of those 30 years were at half or less of the previous high stock prices.
User avatar
Svensk Anga
Posts: 1612
Joined: Sun Dec 23, 2012 4:16 pm

Re: Sequence of returns myth

Post by Svensk Anga »

ResearchMed wrote: Sun Oct 17, 2021 10:21 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
[emphasis added]

Those who retired in, say, 2000 and 2008 would/could have "experienced a fairly quick recovery"... UNLESS they panicked and SOLD at relative lows. In that case, they would have had cash/etc., that did NOT "recover" as the market recovered.

That's why panic selling can be so bad. That locks in the losses, and eliminates the chance of any recovery that might occur.

RM
If the 4% "rule" is to be trusted, the investor has to not just avoid panic selling during market crashes, he must rebalance from bonds to equities. That is one of the assumptions that lie behind the "rule". The covid crash was too quick to call for rebalancing unless you had a fortunate scheduled rebalancing date, or do threshold rebalancing. But in 2000 and 2008, one would need to rebalance to participate adequately in the eventual recovery. The 4% rule worked during the Great Depression in part because stocks could be bought dirt cheap during the darkest days.

I seriously question how many investors, even seasoned Bogleheads, can summon the nerve to rebalance at say, the end of 2008, when it looks like the whole financial system is falling apart. I like liability matching for this reason. Prospective retirees who intend to withdraw in the neighborhood of 4% should give some thought to how disciplined they will be in the next crash. Equity risk is a whole new ballgame when the new savings pipeline has gone dry.
User avatar
Svensk Anga
Posts: 1612
Joined: Sun Dec 23, 2012 4:16 pm

Re: Sequence of returns myth

Post by Svensk Anga »

ResearchMed wrote: Sun Oct 17, 2021 10:21 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
[emphasis added]

Those who retired in, say, 2000 and 2008 would/could have "experienced a fairly quick recovery"... UNLESS they panicked and SOLD at relative lows. In that case, they would have had cash/etc., that did NOT "recover" as the market recovered.

That's why panic selling can be so bad. That locks in the losses, and eliminates the chance of any recovery that might occur.

RM
If the 4% "rule" is to be trusted, the investor has to not just avoid panic selling during market crashes, he must rebalance from bonds to equities. That is one of the assumptions that lie behind the "rule". The covid crash was too quick to call for rebalancing unless you had a fortunate scheduled rebalancing date, or do threshold rebalancing. But in 2000 and 2008, one would need to rebalance to participate adequately in the eventual recovery. The 4% rule worked during the Great Depression in part because stocks could be bought dirt cheap during the darkest days.

I seriously question how many investors, even seasoned Bogleheads, can summon the nerve to rebalance at say, the end of 2008, when it looks like the whole financial system is falling apart. I like liability matching for this reason. Prospective retirees who intend to withdraw in the neighborhood of 4% should give some thought to how disciplined they will be in the next crash. Equity risk is a whole new ballgame when the new savings pipeline has gone dry.
Walkure
Posts: 1023
Joined: Tue Apr 11, 2017 9:59 pm

Re: Sequence of returns myth

Post by Walkure »

Svensk Anga wrote: Sun Oct 17, 2021 6:57 pm
sailaway wrote: Sun Oct 17, 2021 9:46 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
Wouldn't that be specific to US investors. Have other developed countries seen SORR in the last few decades?
Japanese investors with home country bias and equity heavy portfolios would have experienced terrible SORR had they retired say late 1989. They could have gone through a whole 30-year retirement and not gotten back to their market's high. A lot of those 30 years were at half or less of the previous high stock prices.
This is a common misconception, but that is not an example of Sequence of Returns Risk. That's just the risk of a crappy total return. Japan's cumulative CAGR has been weak for 30 years, yes, but the sequence of those returns is not the issue. In other words, a Japanese retiree would not be materially better off today if say, you took the annual returns in '95-'97 and '04-'06 and swapped them, holding their inflation adjusted withdrawals and all else equal.
User avatar
JoeRetire
Posts: 15381
Joined: Tue Jan 16, 2018 1:44 pm

Re: Sequence of returns myth

Post by JoeRetire »

AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk?
You mean negatively affected? Not me. Not yet. Not worried.
This isn't just my wallet. It's an organizer, a memory and an old friend.
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: Sequence of returns myth

Post by AlohaJoe »

sailaway wrote: Sun Oct 17, 2021 10:27 am Sure, but if we take personal situations into account, SORR would also include a serious, expensive medical issue early on.

Or, of particular concern in 2008, boomerang kids increasing expenses.
SORR means "sequence of returns". Expensive medical treatments or boomerang kids have nothing to do with returns. SORR isn't an all purpose "everything that can go wrong in retirement". It only refers to returns. There are other things that can go wrong unrelated to returns.
TheDDC
Posts: 1612
Joined: Mon Jan 08, 2018 10:11 am

Re: Sequence of returns myth

Post by TheDDC »

Walkure wrote: Sun Oct 17, 2021 7:26 pm
Svensk Anga wrote: Sun Oct 17, 2021 6:57 pm
sailaway wrote: Sun Oct 17, 2021 9:46 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
Wouldn't that be specific to US investors. Have other developed countries seen SORR in the last few decades?
Japanese investors with home country bias and equity heavy portfolios would have experienced terrible SORR had they retired say late 1989. They could have gone through a whole 30-year retirement and not gotten back to their market's high. A lot of those 30 years were at half or less of the previous high stock prices.
This is a common misconception, but that is not an example of Sequence of Returns Risk. That's just the risk of a crappy total return. Japan's cumulative CAGR has been weak for 30 years, yes, but the sequence of those returns is not the issue. In other words, a Japanese retiree would not be materially better off today if say, you took the annual returns in '95-'97 and '04-'06 and swapped them, holding their inflation adjusted withdrawals and all else equal.
Yes. This guy's hypothesis relies on the fact that a retired Japanese citizen would have basically contributed all or a significant portion of his earnings into a Nikkei fund in the final working year. Probably not. Anyway, Japan is not America.

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks.
User avatar
AnnetteLouisan
Posts: 7261
Joined: Sat Sep 18, 2021 10:16 pm
Location: New York, NY

Re: Sequence of returns myth

Post by AnnetteLouisan »

A child during stagflation and malaise in the 70s
Graduated into a recession in the early 90s
worked for a major brokerage that is now no more
laid off in 99
worked in the WTC in Sept 01
laid off in 2009
-started investing-
nearing 2mil now in a catastrophic pandemic
not really eager for more bad luck, thank you
Starfish
Posts: 2996
Joined: Wed Aug 15, 2018 6:33 pm

Re: Sequence of returns myth

Post by Starfish »

AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
I guess everybody retired before 2007 with a stock heavy portfolio?
Even worse before 2000.
User avatar
firebirdparts
Posts: 4412
Joined: Thu Jun 13, 2019 4:21 pm
Location: Southern Appalachia

Re: Sequence of returns myth

Post by firebirdparts »

I was affected by sequence-of-returns bonanza. Risk is only one side of the pancake.

I am 55, started investing about 1990. What I have done is
1. Learned a lot of hard lessons
2. Fully invested in Equities early (lost half my net worth twice)
3. Changed to more of a 60/40 sort of portfolio in my 50's.

So I am part way there. I am expecting that it doesn't hurt to notice bonanza in the past, and there might be risk in the future. I have missed out on some gains of course in the last year. You can always compare to something. If I was 100% stocks starting in march 2020, I would have more now.

I did not buy the book, but I read the 3 free chapters of "living off your money" and I can appreciate how those strategies work with the vagaries of the market. A slightly more complex plan like "prime harvesting" in that book is appealing to me. I have a weak emotions and I'm an engineer, so I don't value simplicity above all else just yet. Also, I think I am willing to have a portion internationally invested based on what I see there. So that's kinda where I will be when danger strikes some time when I am retired.
This time is the same
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Sequence of returns myth

Post by Escapevelocity »

ResearchMed wrote: Sun Oct 17, 2021 10:21 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am Unless someone here retired in the 1960s or 1970s, I don't think anyone has been affected.

The danger is retiring right before a crash that takes a while to recover.

So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.

Year 2000 retirees had to deal with both 2000 and 2008, but if they had a decent bond allocation in 2000 when they retired (like we always recommend), they have done fine.
[emphasis added]

Those who retired in, say, 2000 and 2008 would/could have "experienced a fairly quick recovery"... UNLESS they panicked and SOLD at relative lows. In that case, they would have had cash/etc., that did NOT "recover" as the market recovered.

That's why panic selling can be so bad. That locks in the losses, and eliminates the chance of any recovery that might occur.

RM
This is exactly why it is essential for most people to start retirement with a conservative allocation to stocks like 40-60%. It's mostly a risk of behavior not of the markets per se.
jebmke
Posts: 25475
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Sequence of returns myth

Post by jebmke »

Escapevelocity wrote: Mon Oct 18, 2021 10:12 am This is exactly why it is essential for most people to start retirement with a conservative allocation to stocks like 40-60%. It's mostly a risk of behavior not of the markets per se.
This is precisely what I did when I retired in December, 2007. Objectively, I could have gone with a higher equity allocation. However, I wanted to avoid worrying about markets if things went south during the first 10 years (my pension started after 10 years) and I wanted to make sure I would diligently TLH and re-balance if things went south (which they did). I am now past that 10 year mark, my pension started and I have run out of losses harvested in 2008-09. I have decided to allow my equity ratio drift up indefinitely. Objectively I know I left money on the table by starting with 40/60 but I have much more than we will ever need and I have absolutely no regrets.

As a marker for how it affected our behavior, we actually increased our spending above our "plan" in 2009-10 to do home improvements and travel because the deals were too good to pass up and contractors were readily available.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Sequence of returns myth

Post by vanbogle59 »

AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
Myth? Hmmmmm....

Looking backward:
It's not myth that there have been periods in history where the SOR made otherwise sensible SWRs fail.
None of those periods are particularly recent. So, probably not a lot of current posters were directly affected.

Looking forward:
Will there be a future SOR that wipe out the portfolios of retirees faster than they planned?
As Dr. Lanning said: "That, detective, is the right question."
Who knows? But the risk is certainly there.

So, no. Not a myth.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Sequence of returns myth

Post by dbr »

AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
A different answer is that everyone planning a retirement is affected by SORR because one has to plan for the possibility that their own retirement might come at a point in history where a very bad sequence of returns will be a problem if it materializes. SORR is the essence of why worst case scenarios cause SWR results to be as low as they are. The fact that average returns cannot be used to predict safe withdrawal rates was the essence of the work of Bengen and the Trinity study. But SORR is not some special risk that is extra on top of the basic picture.

What people do is that they plan on getting less income safely from their portfolio or they use a different mechanism to take portfolio wealth as income. An example of a different method is annuitizing. Annuitizing does not necessary result in a large increase in amount that can be spent in retirement but it does manage longevity risk. Other approaches involve variable withdrawals, an idea with a long history. Note that investing more conservatively seems to have only a small effect on getting a better SWR.

It should also be understood that the sequence of returns within a single retirement is not the whole story. It can also be that the average return for a whole retirement is lower than expected or hoped for and not just that the sequence within that average is bad. Of course, one might decide that this just illustrates a bad sequence over a long historical period. But there is no mystery regarding how SWR is affected by the inconsistency and unpredictability of returns.
User avatar
Ben Mathew
Posts: 2720
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle

Re: Sequence of returns myth

Post by Ben Mathew »

Sequence of return risk is real. But it can be countered by adjusting the asset allocation to keep risk constant. The idea is simple: if your portfolio is overly sensitive to returns in some years and less sensitive in other years, reduce stock exposure in the sensitive years and increase it in the less sensitive years. In other words, keep risk constant across time (time diversification). It's the approach suggested by formal optimization models and implemented in TPAW. It's simple and it works:

How retirement income responds to a poor sequence of returns (temporary crash)

Summary: There is concern that a market crash right around retirement can permanently damage a retirement because portfolios are at their peak value and very sensitive to returns (sequence of return risk). TPAW manages this risk by maintaining a fixed asset allocation on the total portfolio and employing amortization based withdrawals. This results in a strategy that is well diversified across time, making the outcome less sensitive to the timing of returns. I show that a crash and subsequent recovery would have no harmful effect on retirement even if it occurred just prior to retirement when the savings portfolio is at its peak. During retirement, no matter when the crash occurs, the loss would be limited to reduced income during the depressed years. The income will recover fully if and when the market recovers. There would be no permanent damage to the portfolio that persists after the market has recovered.
Total Portfolio Allocation and Withdrawal (TPAW)
User avatar
Sandtrap
Posts: 19591
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: Sequence of returns myth

Post by Sandtrap »

Watty wrote: Sun Oct 17, 2021 10:17 am
Sequence of returns myth
That should really read "Sequence of returns math". :D

We have been through a historic 12 year bull stock market since about 2009 with only a few blips. Stocks prices have more than quadrupled and interest rates and been generally falling since then so bonds have done very well since then.

Anyone who retired since 2009(like me) has likely done very well and greatly benefited from the sequence of returns. I retired in 2015 and my net worth is about the same now as when I retired despite have paid for 6 years of retirement. These have been some of my most expensive retirement years too since I have not started Social Security and I was not on Medicare.

That does not change the underlying math though and the sequence of returns risk is still out there and very real.

That said with you need to remember that the 4% safe withdrawal rate studies include the Great Depression, double digit inflation years, and several wars an the 4% safe withdrawal figure includes the sequence or returns risk that you might retire just before bad economic times.

I would assume that most retirees who went through the dot com crash and the financial crisis are still doing OK as long as they were spending within the 4% SWR guideline.
Great points.
Well said.

Similar retirement timing as you. Yes. It has worked out well.
Thanks for the reminder of the 4% in a greater context.
j :D
Wiki Bogleheads Wiki: Everything You Need to Know
Ramjet
Posts: 1464
Joined: Thu Feb 06, 2020 10:45 am

Re: Sequence of returns myth [Anyone affected by it?]

Post by Ramjet »

Don't think you will find anyone. The Fed has been handing money out like candy after crashes for a while now
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Sequence of returns myth [Anyone affected by it?]

Post by willthrill81 »

Sequence of returns risk is most definitely not a myth. It's grounded in simple math.

Even though U.S. stocks have averaged close to 7% inflation-adjusted returns, the reason that the '4% rule' isn't the '7% rule' is because of both sequence of returns risk and variability in average returns over certain periods.

Consider an accumulator who invests $1,000 in stocks at the beginning of each year for 10 years. In scenario A, the value of the stocks double at the end of year 1. In scenario B, the value of the stocks double at the end of year 10. In scenario A, the investor finished the period with $11,000 (because only the first $1,000 doubled). In scenario B, the investor finished the period with $20,000 (because all of the contributions doubled). In both cases, the annualized return was 7.2% (i.e., rule of 72). The difference in returns is wholly due to sequence of returns risk.
The Sensible Steward
invest2bfree
Posts: 1279
Joined: Sun Jan 12, 2020 8:44 am

Re: Sequence of returns myth [Anyone affected by it?]

Post by invest2bfree »

AlohaBill wrote: Sun Oct 17, 2021 9:38 am Has anyone here on the Bogleheads been affected by the sequence of returns risk? What did you do?
Not to me directly but in 2004 I was talking to older gentlemen at the gym.

He was planning to retire in 2001 and he said the Dot Com crash pushed his retirement by 3 years.

Was not sure whether he did retire after 2007-2009.

Most of the retirees from late 1999 to 2008 did face some form of it.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
J295
Posts: 3401
Joined: Sun Jan 01, 2012 10:40 pm

Re: Sequence of returns myth

Post by J295 »

Ben Mathew wrote: Mon Oct 18, 2021 11:03 am Sequence of return risk is real. But it can be countered by adjusting the asset allocation to keep risk constant. The idea is simple: if your portfolio is overly sensitive to returns in some years and less sensitive in other years, reduce stock exposure in the sensitive years and increase it in the less sensitive years. In other words, keep risk constant across time (time diversification). It's the approach suggested by formal optimization models and implemented in TPAW. It's simple and it works:

How retirement income responds to a poor sequence of returns (temporary crash)

Summary: There is concern that a market crash right around retirement can permanently damage a retirement because portfolios are at their peak value and very sensitive to returns (sequence of return risk). TPAW manages this risk by maintaining a fixed asset allocation on the total portfolio and employing amortization based withdrawals. This results in a strategy that is well diversified across time, making the outcome less sensitive to the timing of returns. I show that a crash and subsequent recovery would have no harmful effect on retirement even if it occurred just prior to retirement when the savings portfolio is at its peak. During retirement, no matter when the crash occurs, the loss would be limited to reduced income during the depressed years. The income will recover fully if and when the market recovers. There would be no permanent damage to the portfolio that persists after the market has recovered.
Ben.
Thank you.
I don’t know if you’ve weighed in on the following question or not but if willing I’d appreciate your thoughts… (hopefully not out of line or hijacking here, because it relates to asset allocation that Ben mentions) ….
Q. If you were a retiree with sufficient assets so that as a practical matter SORR is not a concern what type of asset allocation would you employ?
BogleFan510
Posts: 1039
Joined: Tue Aug 04, 2020 2:13 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by BogleFan510 »

Why would you title a post that a fundamental principle of investing risk management is a 'myth'? The trend to spread missinformation by people who dont know what they are talking about (e.g. lack trained expertise) really makes me sad.

SOR is a fundamental principle. Please look it up and read what it means.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Sequence of returns myth

Post by willthrill81 »

HomerJ wrote: Sun Oct 17, 2021 9:42 am So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.
Maybe it's just semantics, but year 2000 retirees probably had a lot of heartburn during their first decade. Those with a 60/40 AA and global equities saw their inflation-adjusted starting balance drop by more than 40% a little over 9 years into retirement and never saw their portfolio climb to even 75% of where they started. Yes, they're now in very good shape to make it to the 30 year mark, but that first decade at least was rough.
The Sensible Steward
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Sequence of returns myth

Post by HomerJ »

willthrill81 wrote: Tue Oct 19, 2021 10:45 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.
Maybe it's just semantics, but year 2000 retirees probably had a lot of heartburn during their first decade. Those with a 60/40 AA and global equities saw their inflation-adjusted starting balance drop by more than 40% a little over 9 years into retirement and never saw their portfolio climb to even 75% of where they started. Yes, they're now in very good shape to make it to the 30 year mark, but that first decade at least was rough.
Yes, that's very true. I probably would have tried to find a job at some point, and definitely would have cut back on trips. It would not have been easy.

One nice thing about sequence of return risk is that it's almost always something that happens at the beginning of your retirement, so at least one is usually still young, and not that long out of the workforce. So going back to work is usually a possible option.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Sequence of returns myth

Post by willthrill81 »

HomerJ wrote: Tue Oct 19, 2021 10:59 am
willthrill81 wrote: Tue Oct 19, 2021 10:45 am
HomerJ wrote: Sun Oct 17, 2021 9:42 am So far, someone retiring in 2000 or 2008 experienced a fairly quick recovery and sequence of returns did not hurt them too much.
Maybe it's just semantics, but year 2000 retirees probably had a lot of heartburn during their first decade. Those with a 60/40 AA and global equities saw their inflation-adjusted starting balance drop by more than 40% a little over 9 years into retirement and never saw their portfolio climb to even 75% of where they started. Yes, they're now in very good shape to make it to the 30 year mark, but that first decade at least was rough.
Yes, that's very true. I probably would have tried to find a job at some point, and definitely would have cut back on trips. It would not have been easy.

One nice thing about sequence of return risk is that it's almost always something that happens at the beginning of your retirement, so at least one is usually still young, and not that long out of the workforce. So going back to work is usually a possible option.
I agree that the risk has typically manifested itself in the first 5 years or so of retirement, but those that are age 65 or older when they retire may not be able to return to work when they're age 70+. One thing they have working in their favor is that SPIA payout ratios at least start to get pretty decent past age 70.
The Sensible Steward
User avatar
dogagility
Posts: 3237
Joined: Fri Feb 24, 2017 5:41 am

Re: Sequence of returns myth [Anyone affected by it?]

Post by dogagility »

Math supports the possibility: yes

SORR likely to happen to you: no

Need to angst about SORR: not IMO

Is flexibility good: yes
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
secondopinion
Posts: 6011
Joined: Wed Dec 02, 2020 12:18 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by secondopinion »

willthrill81 wrote: Tue Oct 19, 2021 10:28 am Sequence of returns risk is most definitely not a myth. It's grounded in simple math.
Right on the money. If one is withdrawing in constant or inflation adjusted constant amount, it is hazardous to have the bad years upfront to the portfolio health. Of course, if one is contributing, it is better to have the bad years upfront.

For those removing a constant portfolio percentage only, it protects the portfolio health regardless of the SOR; but it surely impacts the quality of living to get hit with bad years earlier.

Regardless, that is why risk needs to be reduced as we approach the time of withdrawal. Those who have the liberty to take a nominal amount because their portfolio is massive (or live dirt cheap) can afford to take risks that others cannot.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by vanbogle59 »

willthrill81 wrote: Tue Oct 19, 2021 10:28 am In scenario A, the investor finished the period with $11,000...
In scenario B, the investor finished the period with $20,000 ...
In both cases, the annualized return was 7.2%
WHAT???
I have often seen stats like "7% average annualized return" repeated as gospel. I never took the time to look at the calculation.

I just assumed it was reporting what return you would need each year to achieve the total.
You know, if you start with 1K, and finish 10 years later with 20K, you "averaged" 7% (independent of the path).
OTOH, if you start with 1K, and finish 10 years later with 11K, you "averaged" 1% (independent of the path).

I have never heard that before. That's HORRIBLE! That's the sort of stat used car salesman use.

So, if that stat is BS, what is the real stat?
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Sequence of returns myth [Anyone affected by it?]

Post by willthrill81 »

vanbogle59 wrote: Tue Oct 19, 2021 11:28 am
willthrill81 wrote: Tue Oct 19, 2021 10:28 am In scenario A, the investor finished the period with $11,000...
In scenario B, the investor finished the period with $20,000 ...
In both cases, the annualized return was 7.2%
WHAT???
I have often seen stats like "7% average annualized return" repeated as gospel. I never took the time to look at the calculation.

I just assumed it was reporting what return you would need each year to achieve the total.
You know, if you start with 1K, and finish 10 years later with 20K, you "averaged" 7% (independent of the path).
OTOH, if you start with 1K, and finish 10 years later with 11K, you "averaged" 1% (independent of the path).

I have never heard that before. That's HORRIBLE! That's the sort of stat used car salesman use.

So, if that stat is BS, what is the real stat?
It's the difference between time-weighted returns, which is what all funds are required to report, and money-weighted returns, which is what you actually get.

The graphs that show a $10k initial investment would have performed are technically correct because no contributions or withdrawals are made, which results in the time-weighted and money-weighted returns being identical. But few invest that way in the real world.
Last edited by willthrill81 on Tue Oct 19, 2021 3:48 pm, edited 1 time in total.
The Sensible Steward
azanon
Posts: 3142
Joined: Mon Nov 07, 2011 9:34 am

Re: Sequence of returns myth [Anyone affected by it?]

Post by azanon »

The OP is just making other posts on the forums (one is another question) since asking this, and not responding or clarifying the strange title for this one that he started. I've seen that sort of thing considered trolling before.

Sequence of returns "effects" can be positive or negative, so is the OP interested in both types of effects, or only the negative ones? And as others have said, it's not a myth.
HootingSloth
Posts: 1050
Joined: Mon Jan 28, 2019 2:38 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by HootingSloth »

SORR has affected everyone on this forum. If there had been no variation in the sequence of returns that stock investors received over the course of different subperiods of the last century, we would all be talking about the "6% rule" or maybe the "6.7% rule," instead of the "4% rule," and there wouldn't be any "why bonds?" threads because no one would ever bother with bonds.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
jebmke
Posts: 25475
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Sequence of returns myth [Anyone affected by it?]

Post by jebmke »

willthrill81 wrote: Tue Oct 19, 2021 11:31 am It's the difference between time-weighted returns, which is what all funds are required to report, and money-weighted returns, which is what you actually get.

The graphs that how a $10k initial investment would have performed are technically correct because no contributions or withdrawals are made, which results in the time-weighted and money-weighted returns being identical. But few invest that way in the real world.
Exactly; withdrawals are the same as investments just with a different sign. The same math that works in your favor when you regularly invest through downturns works against you when the money flows the other way.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
User avatar
Ben Mathew
Posts: 2720
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle

Re: Sequence of returns myth

Post by Ben Mathew »

J295 wrote: Tue Oct 19, 2021 10:37 am
Ben Mathew wrote: Mon Oct 18, 2021 11:03 am Sequence of return risk is real. But it can be countered by adjusting the asset allocation to keep risk constant. The idea is simple: if your portfolio is overly sensitive to returns in some years and less sensitive in other years, reduce stock exposure in the sensitive years and increase it in the less sensitive years. In other words, keep risk constant across time (time diversification). It's the approach suggested by formal optimization models and implemented in TPAW. It's simple and it works:

How retirement income responds to a poor sequence of returns (temporary crash)

Summary: There is concern that a market crash right around retirement can permanently damage a retirement because portfolios are at their peak value and very sensitive to returns (sequence of return risk). TPAW manages this risk by maintaining a fixed asset allocation on the total portfolio and employing amortization based withdrawals. This results in a strategy that is well diversified across time, making the outcome less sensitive to the timing of returns. I show that a crash and subsequent recovery would have no harmful effect on retirement even if it occurred just prior to retirement when the savings portfolio is at its peak. During retirement, no matter when the crash occurs, the loss would be limited to reduced income during the depressed years. The income will recover fully if and when the market recovers. There would be no permanent damage to the portfolio that persists after the market has recovered.
Ben.
Thank you.
I don’t know if you’ve weighed in on the following question or not but if willing I’d appreciate your thoughts… (hopefully not out of line or hijacking here, because it relates to asset allocation that Ben mentions) ….
Q. If you were a retiree with sufficient assets so that as a practical matter SORR is not a concern what type of asset allocation would you employ?
Sequence of return risk is an uncompensated risk. So there would be no benefit to taking on that risk even if you could. You could achieve the same return with lower risk if you diversified across time.

Not diversifying across time is similar to not diversifying across assets. Consider an extreme example: Suppose asset allocation alternates between 100% stocks and 100% bonds every year. The reward is about the same as a 50/50 allocation, but the risk is much higher. That risk is uncompensated and there would be no reason for anyone to take it on.

So I would still recommend a fixed asset allocation on the total portfolio to keep risk constant because it would provide the lowest risk for any desired return.
Last edited by Ben Mathew on Tue Oct 19, 2021 1:10 pm, edited 1 time in total.
Total Portfolio Allocation and Withdrawal (TPAW)
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by HomerJ »

HootingSloth wrote: Tue Oct 19, 2021 11:43 am SORR has affected everyone on this forum. If there had been no variation in the sequence of returns that stock investors received over the course of different subperiods of the last century, we would all be talking about the "6% rule" or maybe the "6.7% rule," instead of the "4% rule," and there wouldn't be any "why bonds?" threads because no one would ever bother with bonds.
Heh, good point.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
J295
Posts: 3401
Joined: Sun Jan 01, 2012 10:40 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by J295 »

Thanks Ben (and the other thoughtful contributors in this post).
flyingaway
Posts: 3908
Joined: Fri Jan 17, 2014 9:19 am

Re: Sequence of returns myth [Anyone affected by it?]

Post by flyingaway »

I think the Sequence of Returns, i.e., the order of the market returns, may be a risk factor if you follow the 4% rule exactly, i.e., you started with 25X for a 30 years of retirement.

For many people on this board, they start with something like 100X, don't count their social security in the planning, have a part-time job, have a large discretionary budget (can be cut if needed), may have a large inheritance on the way. No, they will not be meaningfully affected by the bad sequence of returns.
secondopinion
Posts: 6011
Joined: Wed Dec 02, 2020 12:18 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by secondopinion »

flyingaway wrote: Tue Oct 19, 2021 5:27 pm I think the Sequence of Returns, i.e., the order of the market returns, may be a risk factor if you follow the 4% rule exactly, i.e., you started with 25X for a 30 years of retirement.

For many people on this board, they start with something like 100X, don't count their social security in the planning, have a part-time job, have a large discretionary budget (can be cut if needed), may have a large inheritance on the way. No, they will not be meaningfully affected by the bad sequence of returns.
Or they are early in contributions and taking the bad sequence first would actually be helpful in the long run.

It really depends on the position.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
User avatar
Candor
Posts: 1287
Joined: Sat May 28, 2011 4:25 pm

Re: Sequence of returns myth [Anyone affected by it?]

Post by Candor »

I'm hoping 12+ years of FI will slay this mythical beast.
The fool, with all his other faults, has this also - he is always getting ready to live. - Seneca Epistles < c. 65AD
Post Reply