Money Monday!

Sequence of Returns Risk…An Important Concept

Sequence of returns risk refers to an investor’s exposure around the order in which investment returns occur. I’ve used an example from the Forbes article below which outlines returns of the same portfolio during different 5-year time periods:

Scenario 1: Year 1 +25%, Year 2 +15% Year 3 +5% Year 4 -5% Year 5 -20%

Scenario 2: Year 1 -20%, Year 2 -5% Year 3 +5% Year 4 15% Year 5 25%

Both of these portfolios in this example would have had a compound annual growth rate of 2.78%, but they would have had substantially different effects on an investor’s need to withdraw money.  The sequence of returns risk is the reason I often urge investors to use caution who are tempted to squeeze out some extra return with money needed for a near-term purchase.

One of the best qualities of the Wheeler Financial investment process is that it tends to do a good job of addressing sequence of returns risk.  By being thoughtful in our cash flow analysis about much money is needed and when, we buy investments that are much more conservative around the time when you will need to withdraw money. The money not needed right away can be invested for the long-term in stocks which tend to return more but also fluctuate more.

For more on sequence of returns risk, you can read the Forbes article here:

If you are concerned about how the money you need most is being invested, please message us to set up a consultation to see how we can help.

Any opinions are those of Jay Wheeler and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct.  Investing involves risk and you may incur a profit or a loss regardless of strategy selected.  Past performance does not guarantee future results.