The Sequence of Returns
What exactly is the "sequence of returns"? The phrase describes the yearly variation in an investment portfolio's rate of return. But what kind of impact do these deviations from the average return have on a portfolio's final value?
Let's take a closer look at a few different investment scenarios. The first few scenarios focus on how market volatility affects a portfolio while assets are accumulating, and the last scenario focuses on how market volatility affects a portfolio from which distributions are being taken.
One study found the sequence of returns appears manageable during accumulation. An analysis from BlackRock compared three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years.
In two of these scenarios, annual returns ranged from a hypothetical -7% to +22%. In the third scenario, the return is simply 7% every year. In all three situations, each investor accumulates the same total of $5,434,372 after 25 years. This is because the average annual return is a hypothetical 7% in each of the three portfolios.1
It’s important to remember that investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
The BlackRock study assumes that the three hypothetical investors evaluated their financial ability to continue making purchases through periods of declining and rising prices.
When you shift from asset accumulation to asset distribution, the story can change. There is the risk that your distribution strategy could coincide with a period of declining prices, which may present a challenge.
Another model investing scenario by BlackRock compared two hypothetical portfolios starting with $1 million. Both portfolios took $60,000 in annual inflation-adjusted withdrawals.1
One portfolio performed well in its early years, earning a 22% return in its first year and a 15% return in its second year. Though it suffered some losses in its later years, the portfolio actually increased in value to $1.1 million 35 years later.
The second portfolio had losses in its early years of -7% in its first year and -4% in its second year. The portfolio ran out of money before the 35-year mark.
Though both portfolios averaged a 7% annual rate of return over the course of 35 years, the early losses suffered by the second portfolio had long-term effects on the portfolio's performance.
If you are preparing to retire, having an understanding of the sequence of returns may help you ask important questions about your overall investment strategy.
1. Blackrock.com, 2025
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