Sequence of returns risk is the risk that the timing of withdrawals from a portfolio coincides with a market downturn. While a portfolio's average return over 30 years might be positive, poor returns in the first few years of retirement can significantly increase the probability of running out of money.
Why Timing Matters
If you are contributing to a portfolio, market drops are actually helpful (you buy more shares). However, when you are withdrawing, market drops are devastating because you must sell more shares to meet your income needs, leaving fewer shares to participate in the eventual recovery.
The Cash Buffer Solution
Retirees can mitigate sequence risk by maintaining a "cash buffer" (typically 12-24 months of expenses) in stable assets like Treasury bills or money market funds. This allows them to avoid selling stocks or ETFs when their prices are low.
DivAgent Educational Standards
This definition is part of the DivAgent Income Academy curriculum. Our glossary is designed to bridge the gap between institutional jargon and retail investor understanding. Each term is reviewed by our Research Team for accuracy, specifically in the context of:
- Tax implications (Ordinary vs. Qualified)
- Impact on Total Return calculations
- Relevance to Option-Income strategies
- Risk assessment in a retirement portfolio
*While we strive for precision, financial terminology can evolve. Always verify definitions with official regulatory sources (SEC, IRS) when making tax or legal decisions.