Investors are aware that investing in capital markets may present any number of risks such as Interest rate risks, company risk, market risk etc. Risk is not a separable companion for long-term growth. Some of the risks can be mitigated by the method of diversification.
Also you may face another less known risk as an investor for which neither the market compensate you nor can it easily be reduced by diversification. Yet it might be the biggest challenge to the sustainability of your retirement income. This risk is called the SEQUENCE OF RETURNS RISK.
The uncertainty of the order of returns which an investor shall receive over a period of time refers to sequence of returns risk.
“Never try to walk across a river just because it has an average depth of four feet”.
For an example- say a market declines 30% which is not to be unexpected. However would you rather experience this decline if at all you have a very small retirement saving or at the point of time when you are all set to retire. Will your savings be more valuable?
Without doubt, this scenario is preferable, but what about the timing which is out of your control?
The sequence of risks is much problematic while you are in retirement. In combination with portfolio withdrawals taken to provide retirement income, have the potential to damage ability of savings to recover even if markets are fully rebound.
If at all you are nearer to your retirement or already undergoing retirement, it is the time to give serious consideration to the sequence of returns risks and take a professional guidance on how you can better manage your portfolio.
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