## Sequence of returns risk while accumulating

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randomguy
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Tue Feb 20, 2018 3:55 pm
Sorry, that was \$1,000 invested annually. It would make a small difference by looking at monthly contributions, but not much.
I always find these numbers a bit deceptive when you try and use them in the real world. Lets compare 2 people at 1k/year.
1988-2007 74k
1989-2008 55k

That is a pretty big difference.

1988-2017 181k
1989-2017 161k

Given 1 less year in the market (call it like 8%) and those numbers are pretty close. In the real world is the difference huge (25%+) or is it pretty small (~5%). In the real world I think for most people they end up with the smaller difference most of the time as it is rare to have event that takes you out of the game (i.e. dying:)). In the end we just end up seeing a lot of the effects of volatility of the last year (the difference between being +20% for the year or -20%). Now there are definitely periods with good/bad returns. I jus think these charts tend to exxagerate things. The 1999 and 2002 person are going to be a lot closer than charts like this indicated.

Topic Author
willthrill81
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Location: USA

### Re: Sequence of returns risk while accumulating

randomguy wrote:
Wed Feb 21, 2018 12:57 am
willthrill81 wrote:
Tue Feb 20, 2018 3:55 pm
Sorry, that was \$1,000 invested annually. It would make a small difference by looking at monthly contributions, but not much.
I always find these numbers a bit deceptive when you try and use them in the real world. Lets compare 2 people at 1k/year.
1988-2007 74k
1989-2008 55k

That is a pretty big difference.

1988-2017 181k
1989-2017 161k

Given 1 less year in the market (call it like 8%) and those numbers are pretty close. In the real world is the difference huge (25%+) or is it pretty small (~5%). In the real world I think for most people they end up with the smaller difference most of the time as it is rare to have event that takes you out of the game (i.e. dying:)). In the end we just end up seeing a lot of the effects of volatility of the last year (the difference between being +20% for the year or -20%). Now there are definitely periods with good/bad returns. I jus think these charts tend to exxagerate things. The 1999 and 2002 person are going to be a lot closer than charts like this indicated.
I don't really understand your point here. You seem to be saying that SRR isn't a big issue "in the real world," but then you state that volatility in the late stages of accumulation can make a big difference (which I entirely agree with).

I'm not sure how an analysis of a historical event "exaggerates things." Some were complaining that Monte Carlo analysis was used in the OP, but it seems that you're saying that historical analysis isn't good enough either.

My point was merely to illustrate that SRR is not limited to retirees; it's a real problem for accumulators with very real consequences.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Oicuryy
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### Re: Sequence of returns risk while accumulating

Let `r_1,r_2,...,r_N` be a sequence of `N` annual returns of a portfolio.

Calculate the `N` products `G_1,G_2,...,G_N` as `G_k=prod_(i=1)^k(1+r_i)`.
Calculate the gummy Magic Sum of the first `N-1` `G`'s as `gMS_(N-1)=sum_(i=1)^(N-1)(1/G_i)`.

If `N` constant annual contributions are made to a portfolio at the start of each year, then the value of the portfolio after `N` years is `G_N(1+gMS_(N-1))` times the annual contribution amount.

If `N` constant annual withdrawals at a rate of `w` times the initial portfolio value are taken at the start of each year, then the value of the portfolio after `N` years is `G_N(1-w(1+gMS_(N-1)))` times the initial value.

The withdrawal rate that takes the portfolio value to zero after `N` withdrawals is `w=1/(1+gMS_(N-1))`. Put another way, the portfolio will survive as long as `gMS_(N-1)<1/w -1`.

A person making contributions wants `gMS` to be as large as possible. A person taking withdrawals wants `gMS` to be as small as possible. Imagine one could rearrange the order of the returns but could not change their values. A person making contributions would arrange the returns in ascending order. A person taking withdrawals would arrange the returns in descending order.

Sequence of returns risk is the risk that the returns will be in the opposite order from what you want.

If only we knew what the `gMS` of our future returns will be.

Ron
Last edited by Oicuryy on Tue Nov 05, 2019 3:04 pm, edited 1 time in total.
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KlangFool
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### Re: Sequence of returns risk while accumulating

OP,

As far as I can tell, in order to avoid of SRR while accumulating

A) Save as much as possible and as early as possible.

B) Adjust your AA to be more conservative as it gets bigger or big enough

Do I get this right?

As far as working longer and so on, those are beyond most folks' control. Only (A) and (B) are possible.

KlangFool

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willthrill81
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Location: USA

### Re: Sequence of returns risk while accumulating

KlangFool wrote:
Wed Feb 21, 2018 4:19 pm
OP,

As far as I can tell, in order to avoid of SRR while accumulating

A) Save as much as possible and as early as possible.

B) Adjust your AA to be more conservative as it gets bigger or big enough

Do I get this right?

As far as working longer and so on, those are beyond most folks' control. Only (A) and (B) are possible.

KlangFool
Yes, save as much as possible can help to minimize the negative effects of SRR. Saving as early as possible can help to reduce the actual incidence of SRR. And yes, shifting to a more conservative AA as you get closer to your goal, whether that be in time or money, helps to minimize the effects of SRR.

As far as working longer, that might be within your control, but it might not too. Many are forced into retirement, but certainly not all are.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
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### Re: Sequence of returns risk while accumulating

A lot of people seem to be fetched up on this obsession with sequence of return when in fact there are combinations of factors that determine the outcome, including in the first place what the average return was/will be. I am not sure the idea of what a "sequence of returns risk" is is completely clear in this discussion. I think the concept is more an issue when it comes to understanding how to plan for retirement without making naive and incomplete assumptions, such as the expected return will actually materialize exactly in each and every year. It isn't really a risk as such different from the general fact that the returns one will receive in each year of retirement are variable and may turn out to be good for the investor or bad for the investor.

triceratop
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### Re: Sequence of returns risk while accumulating

Some early work in this area, of mitigating sequence of returns risk: A different approach to asset allocation by market timer.

The results were interesting. Obviously no guarantees.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

overthought
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### Re: Sequence of returns risk while accumulating

KlangFool wrote:
Tue Feb 20, 2018 9:25 am
4) Most folks rent the house (A) one level below the house (B) that they are willing to buy. Then, they use the cost of renting (B) to justify their purchase of (B). So, for most folks, the calculation is a fraud. They were never to rent (B) under any circumstances. They only use renting (B) to justify their increase in housing expense.

So, it is between 400K townhouse (A) versus 600K SFH(B).

5) In my case, I bought the same house (A) that I am willing to rent. And, the PITI is 20% to 30% lower than renting. Hence, I did not increase my housing expense by renting.
This is something I've heard repeatedly but which does not jive with my own experience at all... starving student with kids, LCOL area, bought an 1800 sqft 3BR house because monthly PITI was ~\$1000 while renting even 900 sqft 2BR in so-so complex was \$1200 or more. Later in life, HCOL area, bought an 1800 sqft 3BR house with PITI ~\$2000 because renting 1200 sqft 3BR would have been closer to \$4000. More recently, MCOL area, bought a 3000 sqft 5BR house with PITI ~\$2000 because renting a 1500 sqft 3BR would have been closer to \$2000.

I totally understand that 1BR condo is a very different beast than a 5000 sqft McMansion, esp. for single or couple... but I've been in the 3BR-with-kids market virtually my entire housing career and in *every* case I've ever seen, the monthly cost of renting even a significantly worse dwelling has been significantly *higher* than buying. The only reasons not to buy were (a) holding the house less than 3 years so closing costs and transfer tax kill the fun; or (b) couldn't afford the down payment, bad credit, etc. that prevent getting the loan in the first place.

Did I just get lucky with a really skewed sample, or does something else explain this discrepancy?

randomguy
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### Re: Sequence of returns risk while accumulating

overthought wrote:
Wed Feb 21, 2018 8:00 pm
KlangFool wrote:
Tue Feb 20, 2018 9:25 am
4) Most folks rent the house (A) one level below the house (B) that they are willing to buy. Then, they use the cost of renting (B) to justify their purchase of (B). So, for most folks, the calculation is a fraud. They were never to rent (B) under any circumstances. They only use renting (B) to justify their increase in housing expense.

So, it is between 400K townhouse (A) versus 600K SFH(B).

5) In my case, I bought the same house (A) that I am willing to rent. And, the PITI is 20% to 30% lower than renting. Hence, I did not increase my housing expense by renting.
This is something I've heard repeatedly but which does not jive with my own experience at all... starving student with kids, LCOL area, bought an 1800 sqft 3BR house because monthly PITI was ~\$1000 while renting even 900 sqft 2BR in so-so complex was \$1200 or more. Later in life, HCOL area, bought an 1800 sqft 3BR house with PITI ~\$2000 because renting 1200 sqft 3BR would have been closer to \$4000. More recently, MCOL area, bought a 3000 sqft 5BR house with PITI ~\$2000 because renting a 1500 sqft 3BR would have been closer to \$2000.

I totally understand that 1BR condo is a very different beast than a 5000 sqft McMansion, esp. for single or couple... but I've been in the 3BR-with-kids market virtually my entire housing career and in *every* case I've ever seen, the monthly cost of renting even a significantly worse dwelling has been significantly *higher* than buying. The only reasons not to buy were (a) holding the house less than 3 years so closing costs and transfer tax kill the fun; or (b) couldn't afford the down payment, bad credit, etc. that prevent getting the loan in the first place.

Did I just get lucky with a really skewed sample, or does something else explain this discrepancy?
It is location specific. Some areas renting is much cheaper. Other buying is much cheaper. I would say there is a trend of LCOL versus HCOL.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

### Re: Sequence of returns risk while accumulating

overthought wrote:
Wed Feb 21, 2018 8:00 pm
KlangFool wrote:
Tue Feb 20, 2018 9:25 am
4) Most folks rent the house (A) one level below the house (B) that they are willing to buy. Then, they use the cost of renting (B) to justify their purchase of (B). So, for most folks, the calculation is a fraud. They were never to rent (B) under any circumstances. They only use renting (B) to justify their increase in housing expense.

So, it is between 400K townhouse (A) versus 600K SFH(B).

5) In my case, I bought the same house (A) that I am willing to rent. And, the PITI is 20% to 30% lower than renting. Hence, I did not increase my housing expense by renting.
This is something I've heard repeatedly but which does not jive with my own experience at all... starving student with kids, LCOL area, bought an 1800 sqft 3BR house because monthly PITI was ~\$1000 while renting even 900 sqft 2BR in so-so complex was \$1200 or more. Later in life, HCOL area, bought an 1800 sqft 3BR house with PITI ~\$2000 because renting 1200 sqft 3BR would have been closer to \$4000. More recently, MCOL area, bought a 3000 sqft 5BR house with PITI ~\$2000 because renting a 1500 sqft 3BR would have been closer to \$2000.

I totally understand that 1BR condo is a very different beast than a 5000 sqft McMansion, esp. for single or couple... but I've been in the 3BR-with-kids market virtually my entire housing career and in *every* case I've ever seen, the monthly cost of renting even a significantly worse dwelling has been significantly *higher* than buying. The only reasons not to buy were (a) holding the house less than 3 years so closing costs and transfer tax kill the fun; or (b) couldn't afford the down payment, bad credit, etc. that prevent getting the loan in the first place.

Did I just get lucky with a really skewed sample, or does something else explain this discrepancy?
overthought,

<<Did I just get lucky with a really skewed sample,>>

You had lived in a very unusual real estate market.

KlangFool

randomguy
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Joined: Wed Sep 17, 2014 9:00 am

### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Wed Feb 21, 2018 12:00 pm

I don't really understand your point here. You seem to be saying that SRR isn't a big issue "in the real world," but then you state that volatility in the late stages of accumulation can make a big difference (which I entirely agree with).

I'm not sure how an analysis of a historical event "exaggerates things." Some were complaining that Monte Carlo analysis was used in the OP, but it seems that you're saying that historical analysis isn't good enough either.

My point was merely to illustrate that SRR is not limited to retirees; it's a real problem for accumulators with very real consequences.
There are big difference in account values but those differences don't effect spending ability a lot of the time. Simple example. Take 2 people both with 1 million dollars and markets with the same valuations, interest rate environments, and so on 1 year before retirement.
Person A. Account goes up to 1.2 million. They retire. Over the next year the account value drops to 1 million
Person B. Account drops to 1 million. They retire. Over the next year the account value rises to 1 million

They had a 50% difference in account values at retirement. Do you think over the next 29 years of retirement that person A can take out a dramatically different amount of money than person B? The issue is that looking at 1 point in time rarely tells whole the story. In 2009 there were articles about how long bonds had beat then stock market over the past 30+ years. That was 100% true. It also ignores the reality that stocks beat those bonds for all but like 3 months of that 30 year period. If you needed money at any time other than those couple months, you would have done much better with stocks.

Lets look at are real world example. 60/40 1k/1k year
1988-2007 74k
2008-2016 take out 3k/year 74k->93k

compared with

1989-2008 55k
2009-2017 take out 3k/year 55k-> 91k
So 9 years into retirement and they are in about the same spot. Now obviously the 1988 person is about to have another nice year to who knows what the 1989 person is going to face. Large starting balance differences. So far minimal spending differences.

Sequence (and absolute returns) matters. But it isn't remotely clear by how much. It isn't like we have many 60-70 year sample to look at and things like Monte Carlo are just flawed for cases like this as they don't factor in things like valuations .

randomguy
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### Re: Sequence of returns risk while accumulating

KlangFool wrote:
Wed Feb 21, 2018 8:07 pm

overthought,

<<Did I just get lucky with a really skewed sample,>>

You had lived in a very unusual real estate market.

KlangFool
Are you sure that his isn't the more normal one (well by land area and not population)? I have never seen a study of this but my impression that buying being cheaper than renting for the same house is true for huge chunks of the country. People don't buy cause they don't have the credit/downpayment/income/desire to be there long term. You have to pay a premium to not have the obligation of a mortgage. And buyers tend to ignore things like maintenance:) These tend to be areas that have CAP rates on rental properties that I have never seen in my life:) For fun you can find some TH/Condo complex with units both for rent and sale and see how much the price differs if you want to do an apples to apples comparison.

KlangFool
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### Re: Sequence of returns risk while accumulating

randomguy wrote:
Wed Feb 21, 2018 9:02 pm
KlangFool wrote:
Wed Feb 21, 2018 8:07 pm

overthought,

<<Did I just get lucky with a really skewed sample,>>

You had lived in a very unusual real estate market.

KlangFool
Are you sure that his isn't the more normal one (well by land area and not population)? I have never seen a study of this but my impression that buying being cheaper than renting for the same house is true for huge chunks of the country. People don't buy cause they don't have the credit/downpayment/income/desire to be there long term. You have to pay a premium to not have the obligation of a mortgage. And buyers tend to ignore things like maintenance:) These tend to be areas that have CAP rates on rental properties that I have never seen in my life:) For fun you can find some TH/Condo complex with units both for rent and sale and see how much the price differs if you want to do an apples to apples comparison.
randomguy,

This is a personal finance forum. Why worry about statistic?

<<my impression that buying being cheaper than renting for the same house>>

Do you rent the same house as what you are prepared to buy?

The only relevant question is at the individual level. Either we, as an individual, trick ourselves into spending more when we buy a house or we don't. If we don't, we are safe. If not, we need to watch out for this bias.

Among my peers, this does not hold true. Hence, they are "House Poor".

KlangFool

randomguy
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### Re: Sequence of returns risk while accumulating

KlangFool wrote:
Wed Feb 21, 2018 9:13 pm

randomguy,

This is a personal finance forum. Why worry about statistic?

<<my impression that buying being cheaper than renting for the same house>>

Do you rent the same house as what you are prepared to buy?

The only relevant question is at the individual level. Either we, as an individual, trick ourselves into spending more when we buy a house or we don't. If we don't, we are safe. If not, we need to watch out for this bias.

Among my peers, this does not hold true. Hence, they are "House Poor".

KlangFool
Because statistics expose personal biases. You think renting is cheaper than buying because your personal experience. But I have only heard you ever mention 1 metro area. Extrapolating from that to the rest of the country is a stretch. You (and I) have no clue if it generalizes and how. My experience is that buying houses in LCOL areas is cheaper than renting worse places (i.e. buying a 3/2 is cheaper than renting an townhouse) at a high level (i.e. mortgage/taxes versus rent) by a significant amount. But I also realize I am looking at a sample size of 2. But it is enough for me to think that the OP situation isn't remotely unusual. I have a feeling it is norm for a significant part of the country. Buying should be cheaper than renting in areas that don't much appreciation but I have no knowledge of how much reality matches theory other than the couple samples I experienced.

And yes I have rented houses and then tried to buy similar things (both 1200-1400 sq ft 3/2s in a 5 mile radius all built in the 60s all in the 700-800k range. I made 7 offers. None were accepted). Rent versus buy was a wash. Renting was going to be cheaper short term by about 500/month but odds are (and I was right looking back 15 years) that long term buying would have been cheaper (the places are now all 1.4-1.6 million and rent is thousands more than what the mortgage payment would have been. Obviously I am a poor real estate investor:)). The choice of rent versus buy though wasn't a financial one. It was a personal one based on changes in life circumstances. And yes I am also aware of how much my experience affects my views on this matter:)

I think you are confusing a symptom (buying the big house) with the cause (i.e. they will spend whatever they have. If it wasn't a house, they would be taking a trip to europe and so on.). It is an important distinction. Being house poor tends to be temporary (even small raises rapidly get you out of the house poor situation over 5-10 years) while spending tends to be pretty permanent (i.e. that 10k raise doesn't go towards savings. It goes towards a boat.). If your a spender, there are far worse things to spend money on than a house. They tend to hold their value better than lets say a boat or european vacation:)

KlangFool
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### Re: Sequence of returns risk while accumulating

randomguy wrote:
Wed Feb 21, 2018 10:00 pm

Being house poor tends to be temporary (even small raises rapidly get you out of the house poor situation over 5-10 years) while spending tends to be pretty permanent (i.e. that 10k raise doesn't go towards savings. It goes towards a boat.). If your a spender, there are far worse things to spend money on than a house. They tend to hold their value better than lets say a boat or european vacation:)
randomguy,

<< Being house poor tends to be temporary (even small raises rapidly get you out of the house poor situation over 5-10 years) >>

Really? We would have to quantify this in term of the house price and income level. Are you talking about the household income of 150K and house price of 600K? Or something else?

KlangFool

Topic Author
willthrill81
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Location: USA

### Re: Sequence of returns risk while accumulating

KlangFool wrote:
Wed Feb 21, 2018 10:16 pm
randomguy wrote:
Wed Feb 21, 2018 10:00 pm

Being house poor tends to be temporary (even small raises rapidly get you out of the house poor situation over 5-10 years) while spending tends to be pretty permanent (i.e. that 10k raise doesn't go towards savings. It goes towards a boat.). If your a spender, there are far worse things to spend money on than a house. They tend to hold their value better than lets say a boat or european vacation:)
randomguy,

<< Being house poor tends to be temporary (even small raises rapidly get you out of the house poor situation over 5-10 years) >>

Really? We would have to quantify this in term of the house price and income level. Are you talking about the household income of 150K and house price of 600K? Or something else?

KlangFool
A 2% annual raise (Fed targeted inflation rate) over 10 years boosts one's gross income by almost 22%, which could be enough to alleviate the 'house poor' status somewhat. Whether that is enough to still enable you to achieve your goals is another matter.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
willthrill81
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Location: USA

### Re: Sequence of returns risk while accumulating

Given some recent posts suggesting that sequence of returns risk is only an issue for retirees, I believe that this thread may need reviving.

Also, given some prior concerns about the Monte Carlo analysis in the OP, I thought that I would illustrate how SRR over the last decade of an investor's accumulation phase can impact their portfolio.

In the below numbers, the investor started with \$10,000 in each instance and contributed \$1,000 annually. Their portfolio was a fixed 60% TSM / 40% TBM (for 1980-1989, intermediate-term Treasuries were used instead of TBM). The number listed is their inflation-adjusted terminal portfolio value.

1980-1989: \$40,038
1990-1999: \$44,830
2000-2009: \$21,108
2010-2019: \$30,542

Obviously, SRR had a dramatic impact in these scenarios, leaving 2000-2009 accumulators with less than half as much as 1990-1999 retirees.

I occasionally hear financial planners talk about getting historically average returns during the last decade of accumulation, but the data are clear that that is far from guaranteed to happen.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Random Walker
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Tue Feb 20, 2018 5:04 pm
Over this time frame, the average return accounted for 64% (.8^2) of the variance in final portfolio value, definitely a big factor. The other 36% is due to the particular sequence of returns. The same is true of accumulation.
This shows there are two issues that can both be addressed with one solution. The first issue is average return and standard deviation. If one can maintain portfolio mean expected return but decrease expected portfolio SD by diversifying across investments, the volatility drag is lessened. Also, through diversification the sequence of returns risk can be lessened.

Dave

Topic Author
willthrill81
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### Re: Sequence of returns risk while accumulating

Random Walker wrote:
Fri Jun 14, 2019 4:44 pm
willthrill81 wrote:
Tue Feb 20, 2018 5:04 pm
Over this time frame, the average return accounted for 64% (.8^2) of the variance in final portfolio value, definitely a big factor. The other 36% is due to the particular sequence of returns. The same is true of accumulation.
This shows there are two issues that can both be addressed with one solution. The first issue is average return and standard deviation. If one can maintain portfolio mean expected return but decrease expected portfolio SD by diversifying across investments, the volatility drag is lessened. Also, through diversification the sequence of returns risk can be lessened.

Dave
Certainly. Beyond the standard diversification of owning broad index funds for both stocks and bonds, do you have any examples you care to share of such diversification consistently reducing sequence of returns risk?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Random Walker
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Joined: Fri Feb 23, 2007 8:21 pm

### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Fri Jun 14, 2019 5:02 pm
Random Walker wrote:
Fri Jun 14, 2019 4:44 pm
willthrill81 wrote:
Tue Feb 20, 2018 5:04 pm
Over this time frame, the average return accounted for 64% (.8^2) of the variance in final portfolio value, definitely a big factor. The other 36% is due to the particular sequence of returns. The same is true of accumulation.
This shows there are two issues that can both be addressed with one solution. The first issue is average return and standard deviation. If one can maintain portfolio mean expected return but decrease expected portfolio SD by diversifying across investments, the volatility drag is lessened. Also, through diversification the sequence of returns risk can be lessened.

Dave
Certainly. Beyond the standard diversification of owning broad index funds for both stocks and bonds, do you have any examples you care to share of such diversification consistently reducing sequence of returns risk?
International diversification, heavy tilt to SV, increase safe bond allocation, add other factors such as CS momentum, Profitability/quality. Can add TS Momentum. Can add the alternatives reinsurance, alternative lending, variance risk premia, AQR style premia.

Dave

Topic Author
willthrill81
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Location: USA

### Re: Sequence of returns risk while accumulating

Random Walker wrote:
Fri Jun 14, 2019 6:11 pm
willthrill81 wrote:
Fri Jun 14, 2019 5:02 pm
Random Walker wrote:
Fri Jun 14, 2019 4:44 pm
willthrill81 wrote:
Tue Feb 20, 2018 5:04 pm
Over this time frame, the average return accounted for 64% (.8^2) of the variance in final portfolio value, definitely a big factor. The other 36% is due to the particular sequence of returns. The same is true of accumulation.
This shows there are two issues that can both be addressed with one solution. The first issue is average return and standard deviation. If one can maintain portfolio mean expected return but decrease expected portfolio SD by diversifying across investments, the volatility drag is lessened. Also, through diversification the sequence of returns risk can be lessened.

Dave
Certainly. Beyond the standard diversification of owning broad index funds for both stocks and bonds, do you have any examples you care to share of such diversification consistently reducing sequence of returns risk?
International diversification, heavy tilt to SV, increase safe bond allocation, add other factors such as CS momentum, Profitability/quality. Can add TS Momentum. Can add the alternatives reinsurance, alternative lending, variance risk premia, AQR style premia.

Dave
Many of those options in the last set have not been available long enough to the retail investor to get a really good idea as to how much they can reduce sequence of returns risk, but several have done so in the past (e.g. international, SCV, bonds, TS momentum). SCV really helped in 2000-2002, and TS momentum helped both then as well as 2008-2009.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

vineviz
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Fri Jun 14, 2019 12:06 pm
In the below numbers, the investor started with \$10,000 in each instance and contributed \$1,000 annually. Their portfolio was a fixed 60% TSM / 40% TBM (for 1980-1989, intermediate-term Treasuries were used instead of TBM). The number listed is their inflation-adjusted terminal portfolio value.

1980-1989: \$40,038
1990-1999: \$44,830
2000-2009: \$21,108
2010-2019: \$30,542

Obviously, SRR had a dramatic impact in these scenarios, leaving 2000-2009 accumulators with less than half as much as 1990-1999 retirees.
I don't think that what you've observed is actually sequence of return risk so much as just plain return risk.

"Sequence of return risk" is generally used to describe the sensitivity of an investment success to the order in which a set of returns occur, not to the overall average level of those returns.

In other words, sequence of return risk would describe the difference between getting -30%, -20%, -10%, 10%, 20%, 30% in retirement instead of 10%, 20%, 30%, -30%, -20%, -10%.

Under accumulation, the difference in outcomes between those series isn't zero but it is much smaller than the difference in outcomes in decumulation.

But the important thing is that both series have the same expected return: it's only the sequence of the returns that differs.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

dbr
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### Re: Sequence of returns risk while accumulating

vineviz wrote:
Fri Jun 14, 2019 9:07 pm
willthrill81 wrote:
Fri Jun 14, 2019 12:06 pm
In the below numbers, the investor started with \$10,000 in each instance and contributed \$1,000 annually. Their portfolio was a fixed 60% TSM / 40% TBM (for 1980-1989, intermediate-term Treasuries were used instead of TBM). The number listed is their inflation-adjusted terminal portfolio value.

1980-1989: \$40,038
1990-1999: \$44,830
2000-2009: \$21,108
2010-2019: \$30,542

Obviously, SRR had a dramatic impact in these scenarios, leaving 2000-2009 accumulators with less than half as much as 1990-1999 retirees.
I don't think that what you've observed is actually sequence of return risk so much as just plain return risk.

"Sequence of return risk" is generally used to describe the sensitivity of an investment success to the order in which a set of returns occur, not to the overall average level of those returns.

In other words, sequence of return risk would describe the difference between getting -30%, -20%, -10%, 10%, 20%, 30% in retirement instead of 10%, 20%, 30%, -30%, -20%, -10%.

Under accumulation, the difference in outcomes between those series isn't zero but it is much smaller than the difference in outcomes in decumulation.

But the important thing is that both series have the same expected return: it's only the sequence of the returns that differs.
It sounds like there is confusion between secular variation in average return and sequence of return issues as you describe well above. This is an issue I think many poster completely ignore or do not understand.

However Willthrill also wrote "Over this time frame, the average return accounted for 64% (.8^2) of the variance in final portfolio value, definitely a big factor. The other 36% is due to the particular sequence of returns. The same is true of accumulation." which sounds precisely like taking proper account of both factors. I may not be paying sufficiently precise attention to all the postings to be sure and therefore note my comments about anyone's comments may be provisional.

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willthrill81
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### Re: Sequence of returns risk while accumulating

vineviz wrote:
Fri Jun 14, 2019 9:07 pm
willthrill81 wrote:
Fri Jun 14, 2019 12:06 pm
In the below numbers, the investor started with \$10,000 in each instance and contributed \$1,000 annually. Their portfolio was a fixed 60% TSM / 40% TBM (for 1980-1989, intermediate-term Treasuries were used instead of TBM). The number listed is their inflation-adjusted terminal portfolio value.

1980-1989: \$40,038
1990-1999: \$44,830
2000-2009: \$21,108
2010-2019: \$30,542

Obviously, SRR had a dramatic impact in these scenarios, leaving 2000-2009 accumulators with less than half as much as 1990-1999 retirees.
I don't think that what you've observed is actually sequence of return risk so much as just plain return risk.

"Sequence of return risk" is generally used to describe the sensitivity of an investment success to the order in which a set of returns occur, not to the overall average level of those returns.

In other words, sequence of return risk would describe the difference between getting -30%, -20%, -10%, 10%, 20%, 30% in retirement instead of 10%, 20%, 30%, -30%, -20%, -10%.

Under accumulation, the difference in outcomes between those series isn't zero but it is much smaller than the difference in outcomes in decumulation.

But the important thing is that both series have the same expected return: it's only the sequence of the returns that differs.
Your point is well taken. That being said, SRR is obviously not confined to specific years; the 2000-2009 decade was rough for retirees as well as those in the last decade of accumulation compared to the prior two decades. But for those who still had significant time left in the accumulation phase, the opposite was true (i.e. it was a good period for them to buy stocks at good valuations).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MathIsMyWayr
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### Re: Sequence of returns risk while accumulating

Sequence of return risk during an accumulation phase is just a mathematical exercise, but is irrelevant in real life. You have to save as much, as often and as long as you can at a proper AA no matter what. On the other hand, SSR in the withdrawal phase is an actionable item. There are many strategies against SRR floating around such as bucket methods, x numbers of years in safe investments, etc. If you implement something similar in the accumulation phase, isn't it any different from market timing?

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willthrill81
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### Re: Sequence of returns risk while accumulating

MathIsMyWayr wrote:
Fri Jun 14, 2019 10:03 pm
Sequence of return risk during an accumulation phase is just a mathematical exercise, but is irrelevant in real life.
That's demonstrably false; my guess is that you haven't read the OP. If SRR is a risk for retirees, then logically it must be a risk for those in the accumulation phase. The big risk as an accumulator is that you will get good returns early in that phase when you don't have much invested and poor returns late in the accumulation phase when you do.

Consider the following two hypothetical retirees. They both have \$600k in their 60/40 portfolio, contribute \$20k annually, and need an inflation-adjusted \$1 million to meet their retirement goal. One started in 1990 and had reached the \$1 million mark by mid-1995. The other started in 2000 and reached the \$1 million mark in 2012. The one beginning in 2000 had to both keep making contributions and potentially delay retirement for seven more years than the one beginning in 1990.

The bucket approach you refer to as potentially helping reduce SRR in retirement has actually been shown to not be effective; it may actually be counter-productive to reducing SRR.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

klaus14
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Fri Jun 14, 2019 10:16 pm
MathIsMyWayr wrote:
Fri Jun 14, 2019 10:03 pm
Sequence of return risk during an accumulation phase is just a mathematical exercise, but is irrelevant in real life.
That's demonstrably false; my guess is that you haven't read the OP. If SRR is a risk for retirees, then logically it must be a risk for those in the accumulation phase. The big risk as an accumulator is that you will get good returns early in that phase when you don't have much invested and poor returns late in the accumulation phase when you do.

Consider the following two hypothetical retirees. They both have \$600k in their 60/40 portfolio, contribute \$20k annually, and need an inflation-adjusted \$1 million to meet their retirement goal. One started in 1990 and had reached the \$1 million mark by mid-1995. The other started in 2000 and reached the \$1 million mark in 2012. The one beginning in 2000 had to both keep making contributions and potentially delay retirement for seven more years than the one beginning in 1990.

The bucket approach you refer to as potentially helping reduce SRR in retirement has actually been shown to not be effective; it may actually be counter-productive to reducing SRR.
Still, for most people delaying retirement is easier than cancelling retirement and going back to work.
Yes SRR is significant risk for accumulators, but not nearly as significant as retirees.
15% VFMF, 15% NTSX | 10% ISCF, 5% EFAV | 5% FNDE, 5% EMGF, 5% VEGBX, 5% LEMB | 15% EDV, 5% CD (5y), 5% I/EE Bonds | 10% GLDM

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willthrill81
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### Re: Sequence of returns risk while accumulating

klaus14 wrote:
Fri Jun 14, 2019 10:29 pm
willthrill81 wrote:
Fri Jun 14, 2019 10:16 pm
MathIsMyWayr wrote:
Fri Jun 14, 2019 10:03 pm
Sequence of return risk during an accumulation phase is just a mathematical exercise, but is irrelevant in real life.
That's demonstrably false; my guess is that you haven't read the OP. If SRR is a risk for retirees, then logically it must be a risk for those in the accumulation phase. The big risk as an accumulator is that you will get good returns early in that phase when you don't have much invested and poor returns late in the accumulation phase when you do.

Consider the following two hypothetical retirees. They both have \$600k in their 60/40 portfolio, contribute \$20k annually, and need an inflation-adjusted \$1 million to meet their retirement goal. One started in 1990 and had reached the \$1 million mark by mid-1995. The other started in 2000 and reached the \$1 million mark in 2012. The one beginning in 2000 had to both keep making contributions and potentially delay retirement for seven more years than the one beginning in 1990.

The bucket approach you refer to as potentially helping reduce SRR in retirement has actually been shown to not be effective; it may actually be counter-productive to reducing SRR.
Still, for most people delaying retirement is easier than cancelling retirement and going back to work.
Yes SRR is significant risk for accumulators, but not nearly as significant as retirees.
True, but it's a real risk to both. Delaying retirement for seven years, per my example above, could be pretty bad.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

klaus14
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Fri Jun 14, 2019 10:36 pm
True, but it's a real risk to both. Delaying retirement for seven years, per my example above, could be pretty bad.
Yes. we are on the same page here. I think as you get near your retirement age, you should actively try to reduce volatility of overall portfolio. Bond Tent is one method to do that.
15% VFMF, 15% NTSX | 10% ISCF, 5% EFAV | 5% FNDE, 5% EMGF, 5% VEGBX, 5% LEMB | 15% EDV, 5% CD (5y), 5% I/EE Bonds | 10% GLDM

MathIsMyWayr
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Location: CA

### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Fri Jun 14, 2019 10:16 pm
MathIsMyWayr wrote:
Fri Jun 14, 2019 10:03 pm
Sequence of return risk during an accumulation phase is just a mathematical exercise, but is irrelevant in real life.
That's demonstrably false; my guess is that you haven't read the OP. If SRR is a risk for retirees, then logically it must be a risk for those in the accumulation phase. The big risk as an accumulator is that you will get good returns early in that phase when you don't have much invested and poor returns late in the accumulation phase when you do.

Consider the following two hypothetical retirees. They both have \$600k in their 60/40 portfolio, contribute \$20k annually, and need an inflation-adjusted \$1 million to meet their retirement goal. One started in 1990 and had reached the \$1 million mark by mid-1995. The other started in 2000 and reached the \$1 million mark in 2012. The one beginning in 2000 had to both keep making contributions and potentially delay retirement for seven more years than the one beginning in 1990.
I am not questioning the math. Making simple math correct is trivial, but the big question is what the result of the math means to an investor saving for retirement. You cannot choose when to start saving. Math tells one is lucky and the other is not.

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willthrill81
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### Re: Sequence of returns risk while accumulating

MathIsMyWayr wrote:
Fri Jun 14, 2019 10:55 pm
willthrill81 wrote:
Fri Jun 14, 2019 10:16 pm
MathIsMyWayr wrote:
Fri Jun 14, 2019 10:03 pm
Sequence of return risk during an accumulation phase is just a mathematical exercise, but is irrelevant in real life.
That's demonstrably false; my guess is that you haven't read the OP. If SRR is a risk for retirees, then logically it must be a risk for those in the accumulation phase. The big risk as an accumulator is that you will get good returns early in that phase when you don't have much invested and poor returns late in the accumulation phase when you do.

Consider the following two hypothetical retirees. They both have \$600k in their 60/40 portfolio, contribute \$20k annually, and need an inflation-adjusted \$1 million to meet their retirement goal. One started in 1990 and had reached the \$1 million mark by mid-1995. The other started in 2000 and reached the \$1 million mark in 2012. The one beginning in 2000 had to both keep making contributions and potentially delay retirement for seven more years than the one beginning in 1990.
I am not questioning the math. Making simple math correct is trivial, but the big question is what the result of the math means to an investor saving for retirement. You cannot choose when to start saving. Math tells one is lucky and the other is not.
Whether one got lucky or the other got the short end of the risk spectrum, the point is that SRR is real for accumulators and retirees.

You cannot choose when to start saving, but it doesn't mean that you are necessarily a passive recipient of SRR. Just like there are steps that can be taken to reduce SRR as a retiree, so there are steps that accumulators can take as well.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

klrjaa
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### Re: Sequence of returns risk while accumulating

@ mathismyway….An interesting and relevant take on path dependency where savings rate changes as this is a much more likely scenario over one's saving lifetime. The ending wealth is massively different. Reducing volatility during accumulation phase is critical. So the answer to your big question is....it's matters a ton https://investresolve.com/blog/sequence ... r-savings/

MathIsMyWayr
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### Re: Sequence of returns risk while accumulating

klrjaa wrote:
Sat Jun 15, 2019 7:19 am
@ mathismyway….An interesting and relevant take on path dependency where savings rate changes as this is a much more likely scenario over one's saving lifetime. The ending wealth is massively different. Reducing volatility during accumulation phase is critical. So the answer to your big question is....it's matters a ton https://investresolve.com/blog/sequence ... r-savings/
SRR takes place because there are two kinds of arithmetic operations involved, multiplications and subtractions during the withdrawal phase, and multiplications and additions during the accumulation phase. Unfortunately multiplication and subtraction (or addition) do not commute with each other. Subtraction is just an addition of the negative of the original number and share the same property as addition. As a quick example, let's consider a two year investment with market gains of -10% and +10%.
• (-10%, +10%): you will have ((1-10%) + 1)*(1+10%)=2.09
• (+10%, -10%): ((1+10%)+1)*(1-10%)=1.89
I meant it is irrelevant besides "to save as much, as often and as long as you can at a proper AA no matter what." "SRR" is the basis of the commonly accepted investment recommendation of choosing gliding path "Reduce risk as you approach the horizon."

An interesting conclusion of the link:
By actively managing portfolio risk and dynamically assembling diversified portfolios of global assets twice per month, our AAA process is engineered to minimize risks associated with sequence of returns.

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willthrill81
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### Re: Sequence of returns risk while accumulating

MathIsMyWayr wrote:
Sat Jun 15, 2019 8:07 am
An interesting conclusion of the link:
By actively managing portfolio risk and dynamically assembling diversified portfolios of global assets twice per month, our AAA process is engineered to minimize risks associated with sequence of returns.
Considering what those folks do in their business, their statement fits that very well. But it is obviously not necessary to take on an 'active' approach to investing in order to reduce SRR. You're correct that ramping up one's allocation to fixed income as one approaches retirement is one way to do this, but that can also exacerbate the issue. What if, for instance, stock returns are very good that last decade, but you've reduced your stock allocation to the point that you don't benefit much from them?

Personally, I view the best 'passive' approach to this issue to be planning to reach financial independence well before you plan on actually retiring. For instance, I'm planning on being FI by age 55, but if it takes me another 5-10 years to get there, I'll be alright. If someone is planning on retiring at age 67 and must delay it by another decade, they may be in serious trouble.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

siamond
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### Re: Sequence of returns risk while accumulating

Every now and then, I wondered if there was a simple metric akin to the Max Withdrawal Rate (aka SWR or SSR) for a specific sequence of returns, something which would capture both growth and the sequence of return effect for an accumulator. Something we could use in a backtest to show an accumulator what would have happened for a given sequence of past returns, if a fixed amount of money had been contributed (and invested) every year.

Yesterday, I finally stopped to think a bit harder about it and the answer turned out to be simple and intuititve, just compute the IRR (Internal Rate of Return) of such annual investment strategy over a given period of time characterized by a given sequence of returns.

Here are the Wikipedia/IRR page and the Investopedia/IRR page if you need a quick refresh. A simple definition for our purpose is that it is the fixed rate of return that would end up with the same portfolio value than a given sequence of real-life returns, when accumulating the same amount of money every year. It is best computed in real terms, to make the fixed contribution approach more realistic.

This is quite handy as we now have three key metrics for a given sequence of returns (R1, R2,...,RN):
- CAGR: captures the trajectory of an initial investment, left untouched for N years
- IRR: captures the trajectory achieved by making fixed contributions every year over N years
- Max WR: captures the optimal trajectory to deplete an initial investment with fixed withdrawals every year over N years

siamond
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### Re: Sequence of returns risk while accumulating

Then I pondered how to compute this in an efficient manner in the Simba backtesting spreadsheet. Excel has a handy IRR() function, but its entry parameters are cash flows, not a sequence of returns, and this was making things clunky. Luckily, I stumbled on this post:
Oicuryy wrote:
Tue Feb 20, 2018 12:47 am
siamond's formulas for calculating SSR, the sustainable spending rate of constant annual withdrawals, can also be used in calculating the ending value of constant annual contributions. Just multiply the constant contribution amount by Gn/SSR.
After doing some algebra, Oicuryy is absolutely correct. And then it's a simple extra step of using the RATE() function, computing the rate of return to go from \$0 to the 'ending value' in steps of \$1. And since we already have SSR (aka Max WR) math in Simba, it was very easy to add. I also extended this (much simpler) online spreadsheet to illustrate how to compute both Max.WR and IRR in a very compact manner.

Those of you who have a bit of a math/spreadsheet bent can reflect on those formulas I assembled (first one looks complicated, but it's actually very simple, just think of the returns compounding an extra \$1 invested every year):

siamond
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### Re: Sequence of returns risk while accumulating

So... here is the kind of stuff we can look at while backtesting... Both charts represent the outcome of investing cycles lasting 30 years, using past US returns (stocks and bonds), starting a given cycle on a given past year (horizontal axis). The outcome (vertical axis) can be either CAGR or Max WR or IRR. Of course, this is backtesting, hence analyzing things in hindsight. Click on the images to see a larger version. The charts compare outcomes for a 80/20 AA with outcomes for a 50/50 AA.

Perspective of a retiree (CAGR is informative, but to acknowledge the sequence of return effect, the Max WR is what really matters):

Perspective of an accumulator (CAGR is informative, but to acknowledge the sequence of return effect, the IRR is what really matters):

If you perceive that Max. WR and IRR act in kind of an opposite manner, you would be right on. Oicuryy's magic formula made it extremely clear. And it's easy to understand. If you start accumulating in 1950 for 30 years, the last decade is going to be miserable (cf. oil crisis), decimating your savings. But if you had retired in 1950, the first two decades of sustained growth should have make you a wealthy retiree and then the crisis that followed shouldn't have been a big deal. Inverse scenario if you start in 1970. Etc.

Finally, to come back to the point willthrill81 was making in his OP, the sequence of returns matters a LOT for both retirees and accumulators. Comparing the CAGR chart to the IRR/Max.WR charts should convey the point quite clearly, the relation is quite loose to say the least.

MoneyMarathon
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Mon Feb 19, 2018 5:08 pm
It illustrates the result of a Monte Carlo simulation of a portfolio comprised of 60% U.S. total stock market and 40% intermediate term Treasuries with the initial portfolio being worth \$1,000 and \$1,000 invested monthly for twenty years and with the portfolio rebalanced annually. Historic returns from 1972-2017 were used to derive both the mean returns and standard deviation; the same was done for inflation.
Typically a Monte Carlo simulation samples with replacement. Also, the range of years sampled (46 or so) is greater than the number of years in each simulation (20). So we're not isolating sequence of returns risk. A very large effect is just whether your average annual arithmetic return is higher or lower.

This could be corrected by using sampling without replacement and using the same number of simulated years as sample years.
dbr wrote:
Wed Feb 21, 2018 7:28 pm
A lot of people seem to be fetched up on this obsession with sequence of return when in fact there are combinations of factors that determine the outcome, including in the first place what the average return was/will be. I am not sure the idea of what a "sequence of returns risk" is is completely clear in this discussion.
Good point.

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willthrill81
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### Re: Sequence of returns risk while accumulating

siamond wrote:
Sat Feb 22, 2020 11:23 pm
So... here is the kind of stuff we can look at while backtesting... Both charts represent the outcome of investing cycles lasting 30 years, using past US returns (stocks and bonds), starting a given cycle on a given past year (horizontal axis). The outcome (vertical axis) can be either CAGR or Max WR or IRR. Of course, this is backtesting, hence analyzing things in hindsight. Click on the images to see a larger version. The charts compare outcomes for a 80/20 AA with outcomes for a 50/50 AA.

Perspective of a retiree (CAGR is informative, but to acknowledge the sequence of return effect, the Max WR is what really matters):

Perspective of an accumulator (CAGR is informative, but to acknowledge the sequence of return effect, the IRR is what really matters):

If you perceive that Max. WR and IRR act in kind of an opposite manner, you would be right on. Oicuryy's magic formula made it extremely clear. And it's easy to understand. If you start accumulating in 1950 for 30 years, the last decade is going to be miserable (cf. oil crisis), decimating your savings. But if you had retired in 1950, the first two decades of sustained growth should have make you a wealthy retiree and then the crisis that followed shouldn't have been a big deal. Inverse scenario if you start in 1970. Etc.

Finally, to come back to the point willthrill81 was making in his OP, the sequence of returns matters a LOT for both retirees and accumulators. Comparing the CAGR chart to the IRR/Max.WR charts should convey the point quite clearly, the relation is quite loose to say the least.
Outstanding work as usual Siamond! I really like how you are consistently able to take complicated topics and simplify them to an easy to read chart.

As an aside, it's very interesting that the 80/20 AA led to a better IRR than a 50/50 in every single instance. There were only a couple of instances where 50/50 led to a very slightly larger SWR for retirees as well.
Last edited by willthrill81 on Sat Feb 22, 2020 11:48 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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### Re: Sequence of returns risk while accumulating

MoneyMarathon wrote:
Sat Feb 22, 2020 11:34 pm
willthrill81 wrote:
Mon Feb 19, 2018 5:08 pm
It illustrates the result of a Monte Carlo simulation of a portfolio comprised of 60% U.S. total stock market and 40% intermediate term Treasuries with the initial portfolio being worth \$1,000 and \$1,000 invested monthly for twenty years and with the portfolio rebalanced annually. Historic returns from 1972-2017 were used to derive both the mean returns and standard deviation; the same was done for inflation.
Typically a Monte Carlo simulation samples with replacement. Also, the range of years sampled (46 or so) is greater than the number of years in each simulation (20). So we're not isolating sequence of returns risk. A very large effect is just whether your average annual arithmetic return is higher or lower.

This could be corrected by using sampling without replacement and using the same number of simulated years as sample years.
dbr wrote:
Wed Feb 21, 2018 7:28 pm
A lot of people seem to be fetched up on this obsession with sequence of return when in fact there are combinations of factors that determine the outcome, including in the first place what the average return was/will be. I am not sure the idea of what a "sequence of returns risk" is is completely clear in this discussion.
Good point.
I specifically differentiated average returns in a period from SRR in that same period in this post. Siamond very aptly demonstrated the impact of SRR on both retirees and accumulators just above.
Last edited by willthrill81 on Sat Feb 22, 2020 11:49 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

firebirdparts
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### Re: Sequence of returns risk while accumulating

deleted
Last edited by firebirdparts on Sat Feb 22, 2020 11:52 pm, edited 1 time in total.
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MoneyMarathon
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Sat Feb 22, 2020 11:43 pm
I specifically differentiated average returns in a period from SRR in that same period in this post.
Siamond very aptly demonstrated the impact of SRR on both retirees and accumulators just above.
I wasn't arguing that there is no effect. The original post is just fundamentally flawed.

Reviewing his post, it looks like Siamond also failed to isolate the impact of "sequence of returns risk." Maybe we should just call it something else, if we're actually talking about something else, like "you might get lower or greater returns, depending on when you invest, and yeah a big part of that is sequence of returns risk, but average returns in the time period is also a factor." I guess it doesn't sound as technical as calling it SRR, but it would more accurately reflect what you're saying.
Last edited by MoneyMarathon on Sat Feb 22, 2020 11:52 pm, edited 1 time in total.

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willthrill81
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### Re: Sequence of returns risk while accumulating

MoneyMarathon wrote:
Sat Feb 22, 2020 11:46 pm
willthrill81 wrote:
Sat Feb 22, 2020 11:43 pm
I specifically differentiated average returns in a period from SRR in that same period in this post.
Fixed now. Thanks.
MoneyMarathon wrote:
Sat Feb 22, 2020 11:46 pm
I wasn't arguing that there is no effect. The original post is just fundamentally flawed.
Be that as it may, it's better to try and not get it perfect than to never try at all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MoneyMarathon
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### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Sat Feb 22, 2020 11:50 pm
Be that as it may, it's better to try and not get it perfect than to never try at all.
Doing it right isn't very difficult, just sample without replacement and include the whole sample each time (as I pointed out in the first reply). I may do it later if I have time.

flaccidsteele
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### Re: Sequence of returns risk while accumulating

I started investing/accumulating in the 90s, a few years before the tech crash, and never held any bonds nor did I rebalance. Ever

I also never held a management job. Never made a high salary nor had an inheritance

I retired in my 40s with over \$5m

I didn’t even know about sequence of returns risk

I guess I lucked out (or sequence risk isn’t a big deal)
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat

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willthrill81
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### Re: Sequence of returns risk while accumulating

flaccidsteele wrote:
Sat Feb 22, 2020 11:56 pm
I didn’t even know about sequence of returns risk

I guess I lucked out (or sequence risk isn’t a big deal)
You don't have to understand all of the nuances of investing in order to be successful at it.

Siamond's post above demonstrated that sequence of returns risk is a very big deal for both accumulators and retirees.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

flaccidsteele
Posts: 350
Joined: Sun Jul 28, 2019 9:42 pm

### Re: Sequence of returns risk while accumulating

willthrill81 wrote:
Sat Feb 22, 2020 11:59 pm
flaccidsteele wrote:
Sat Feb 22, 2020 11:56 pm
I didn’t even know about sequence of returns risk

I guess I lucked out (or sequence risk isn’t a big deal)
You don't have to understand all of the nuances of investing in order to be successful at it.

Siamond's post above demonstrated that sequence of returns risk is a very big deal for both accumulators and retirees.
I guess 2025 will mark my “30 year investing period” anniversary as an accumulator. Sequence of returns risk hasn’t been a big deal for me. If it’s a big deal for others, then I lucked out
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat

siamond
Posts: 5317
Joined: Mon May 28, 2012 5:50 am

### Re: Sequence of returns risk while accumulating

flaccidsteele wrote:
Sun Feb 23, 2020 12:03 am
I guess 2025 will mark my “30 year investing period” anniversary as an accumulator. Sequence of returns risk hasn’t been a big deal for me. If it’s a big deal for others, then I lucked out
You are quite right... I just ran the numbers, checking the 1996-2019 investing period (hence 24 years), and CAGR and IRR are nearly identical for both a 80/20 AA and a 50/50 AA. This is actually quite remarkable, there are very few cases like that for other starting years.

flaccidsteele
Posts: 350
Joined: Sun Jul 28, 2019 9:42 pm

### Re: Sequence of returns risk while accumulating

siamond wrote:
Sun Feb 23, 2020 12:12 am
flaccidsteele wrote:
Sun Feb 23, 2020 12:03 am
I guess 2025 will mark my “30 year investing period” anniversary as an accumulator. Sequence of returns risk hasn’t been a big deal for me. If it’s a big deal for others, then I lucked out
You are quite right... I just ran the numbers, checking the 1996-2019 investing period (hence 24 years), and CAGR and IRR are nearly identical for both a 80/20 AA and a 50/50 AA. This is actually quite remarkable, there are very few cases like that for other starting years.
+1 Damn.

It *is* better to be lucky than good!
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat

siamond
Posts: 5317
Joined: Mon May 28, 2012 5:50 am

### Re: Sequence of returns risk while accumulating

MoneyMarathon wrote:
Sat Feb 22, 2020 11:46 pm
Reviewing his post, it looks like Siamond also failed to isolate the impact of "sequence of returns risk." Maybe we should just call it something else, if we're actually talking about something else, like "you might get lower or greater returns, depending on when you invest, and yeah a big part of that is sequence of returns risk, but average returns in the time period is also a factor." I guess it doesn't sound as technical as calling it SRR, but it would more accurately reflect what you're saying.
I actually spoke of 'sequence of returns effect', not risk. And no, I didn't try to isolate it, my goal was to provide an intuitive and easy to compute metric (IRR) which is palatable for accumulators, combining the effect of growth and sequence of returns.

The first part of this article did make an attempt at truly isolating the sequence of returns risk per se, if that is what you seek. This is somewhat interesting from an academic standpoint, but doesn't seem a metric palatable enough in practice.