I’ve been sitting on this post for a few weeks now, worrying that it’s too long, and the point I’m trying to make is going to be lost in all the words, so I’ll make it really simple for those of you who won’t get through 2000+ words: the markets are going to do what the markets are going to do, there is no portfolio on earth that will keep your portfolio going up when everyone else’s are going down every single time, so stop worrying about what the market will do in your lifetime and start focusing on what you can control: your spending, your savings, and your expectations.

If I told you that the day you were born is the most significant number in your investing life, and that it has more to do with the path your investments will follow than your asset allocation, your annual savings rate, or the management fees you’re paying, you’d think I’d developed a fascination with astrology and had to consult a star chart before rebalancing, wouldn’t you?

It’s true (though not the astrology part). The particular sequence of market returns that you’ll enjoy (but not necessarily participate in, more on that later) throughout your lifetime starts when you’re born, ends when you die, is entirely outside of your control, and, if you’re not careful, will heavily influence when you start investing, how you’ll do it, and your outlook on life when you turn those investments into income.

“Sequence of returns”, for those of you not interested in reading retirement income research on a daily basis, simply means the order in which your portfolio performs: a portfolio that has a good year followed by a bad year will be very different than a portfolio that has a bad year followed by a good year.

Sequence of Returns as a Highway

Think of your personal sequence of returns as the only highway you can take to get to your destination. If you plan on living off of your savings in retirement and have a finite ability to save, you’re on the highway.

I recently had the pleasure of driving down to Toronto twice in two weeks. On both trips I left at the same time and drove the same route: Highway 11 to 400 to 401 West to the Don Valley Parkway and into the heart of the city, but I arrived at very different times and experienced very different driving conditions along the way.

If you’ve ever driven toward Toronto (or any major city) first thing in the morning, you’ll be familiar with what I experienced. I had a little bit of control over when I left (early), but zero control over when everyone else left (late, apparently), how they drove when they got on the highway (meh), whether construction had closed any lanes (it had), and whether it was snowing (once) or not (once). The first trip was fast until I hit the city, and then much slower as I made my way across and down into the heart of the city. The second trip started slow and never really sped up from there, and I’m fairly certain that the entire province of Ontario and most of Manitoba had decided to drive into Toronto that morning with me.

Stress in the Driver’s Seat and What You Can Control

Now, if you’re the type who likes to drive but gets stressed out by traffic, the first trip wouldn’t have been too bad. You would have faced the increased traffic at the end of the trip with equanimity, knowing that the light traffic at the beginning had given you plenty of time to get where you needed to go. It would have been to easy make good decisions at a relatively leisurely pace.

The second trip, on the other hand, would have started off bad and gotten worse from there. The slow start, heavy traffic, and bad weather would have stressed you out, and as your appointed arrival time got closer, the pressure would have increased, you would have driven faster (when you could) and left less room between you and the car in front of you. The amount of time you gave yourself to make decisions would have probably gotten shorter, and the resulting decisions consequently worse.

Without stretching the metaphor too far, your market returns may start slow, speed up in the middle, grind forward inch by inch, and stop completely for a while before shooting forward quickly and then slowing down again with no concern for where you are in life. You have control over when you start and how you behave once you’re in the market, but not the speed with which it travels.

And here is where the metaphor ends, because – of course – there’s plenty of reliable information available about the future to a motorist: turn on most radio stations and they’ll tell you if the road you’re on has a few lanes closed, or is moving quickly, or if you should take another route entirely. Except for the fact that markets generally go up in aggregate, there’s no such thing as reliable future information for investors to act on both consistently and profitably, and anybody who tells you different is selling something.

At the beginning of this piece, I cautioned you to be careful about letting your sequence of returns influence your behaviour in the markets, and this is where I want to focus: despite the fact that the market itself cannot be controlled, you can control your own behaviour.

When Sequence of Returns Matters

Early on in your savings and investing life, the sequence of market returns assigned to you by the accident of your birthday aren’t much of a big deal, provided you can keep your head level and your costs low. For you, my advice is to embrace complacency, watch your fees, and keep on saving.

Later on in life, however, when the time comes for your investments to fulfil their purpose and provide you with income, the effect that your particular sequence of market returns has becomes a very big deal indeed. Anyone that has to withdraw a certain amount of money from their portfolio by selling invested assets (no matter what the price of those assets happens to be that day) is exposed to sequence of returns risk in a very big and important way.

You might be ready – so ready – to retire just as the market takes a nosedive and stays there for a while. Your neighbour, someone a few years younger or older than you, who earned the same amount, saved the same amount, and wants roughly the same kind of retirement as you do might be ready to retire just as markets start shooting upwards. You, with that disappointing sequence of returns the market and your birthday handed you might stick to your asset allocation, delay retirement, reduce your spending, and be more or less fine. Or you might get desperate, start taking bigger and bigger risks, scrabble for higher yields, pay for guarantees you don’t really understand, and generally drive your portfolio irresponsibly in the hopes of getting a few inches closer to your goal without seeing the hazards you’re exposing yourself to. Your neighbour might be lulled into thinking that his incredibly favourable sequence of returns was the result of his own special skill, take stupid risks, spend without thinking, and end up in much the same position as you but with no idea how he got there. Or he might realize that his sequence of returns was a fortunate turn of events, retire a little earlier, gradually increase his spending, and (drum roll please)…be more or less fine.

Unsatisfactorily – perversely, even – the only time you could actually quantify the “success” of either path (provided you believe that a “successful” retirement is one in which you end up having spent the most amount of money) is when it’s too late to do anything at all about it. As in, when you’re both dead.

Participating in Market Returns vs. Driving Like a Lunatic

This, incidentally, is one of the reasons we can talk about and mostly agree on reasonable expectations for future market returns on average over the next ten years while being completely unable to do the same thing for the return you personally will earn over the next ten years. While in an ideal world, you and your neighbour both keep your head, invest regularly through thick and thin, and rebalance on schedule, it’s entirely likely that – here in the real world – at least one of you will lose your head, stop investing when markets are down, throw your money into the ring again when markets have been up for a year, and stop rebalancing entirely because the thought of selling a winner to buy a loser gives you hives.

How to Worry Less About Your Sequence of Returns (Spoiler Alert: It Involves Sacrifice)

If the only thing you take away from this piece is that you need to have realistic expectations in order to avoid bad decisions in moments of panic or over confidence, that’s great. If it has convinced you to fold your hands, shrug your shoulders, and invest in a low cost, well-diversified, and balanced portfolio of stocks and bonds that you add to regularly, rebalance annually, decrease the stock side gradually, and forget about for the rest of the year, well…that’s great too. Bad behaviour is much easier to avoid if you truly believe that – outside of setting up a good infrastructure – there is nothing you or especially the expensive money manager with the big promises can do to change the outcome of your investments.

But what I’d really like to accomplish with this piece is to lay the foundation for you to truly understand the five possible actions that you can take as you approach retirement and look for ways to avoid the worst that sequence of return risk can do to you. They are easy to type, and sound almost cavalierly pat when said out loud, but are simultaneously the most difficult and astonishingly simple actions you can take:

  1. Save more now,
  2. Spend less now and in retirement,
  3. Work longer (which just another way of saying “save more and spend less”),
  4. Increase the amount of guaranteed income you’ll have in retirement, or
  5. Some combination of all four.

“Save more now” you’re already pretty familiar with, I’m sure, and you’re likely even more familiar with “spend less now and in retirement”, since it’s often the easiest solution to offer and understand. Each involves sacrifice. For example, a very smart person could have realized by now that a clever way to avoid sequence of return risk is to save enough so that you can live on only the dividends and interest that the portfolio spins out, bypassing the need to sell anything in order to live comfortably. That very smart person likely worked very, very hard to increase her income and saved enormous amounts of it. That very smart person will spend none of her capital and will have very fortunate heirs.

“Work longer” might be impossible to follow through on, depending on your health and whether there’s work to be had, so for most people a more reasonable recommendation might be to “plan on considering the possibility of working longer than you’d like, but don’t rely on it”.

“Increase the amount of guaranteed income you’ll have in retirement” is an almost universally applicable piece of retirement planning advice, and although it comes with its own sacrifices, it’s one you should pay attention to. Every dollar that you get from guaranteed income – that is, Old Age Security, the Canada Pension Plan, and/or a defined benefit pension plan, and/or an annuity – is one less dollar you have to withdraw from your investments when markets are down. Of course, the kind of guaranteed income you buy over your lifetime of work like CPP or a pension, or all at once like an annuity is purchased at the expense of having one less dollar available to be invested as markets go up.

The sacrifice involved in increasing your guaranteed income is of the “woulda, coulda, shoulda” variety, as in “if I had only known that I would get a really favourable sequence of returns in retirement, I wouldn’t have bought that annuity”, or “if only I had know that I would get a very bad sequence of returns in retirement, I would have bought an annuity instead”, or “if I had only known that I’d die at age 70, I wouldn’t have cared” and – again – is quantifiable only when it is too late to make a difference.

Maximizing your guaranteed income can seem expensive, which is why most of us can only afford to increase a few slices of our retirement income rather than the whole pie. It’s also why the solution for most regular people worried about sequence of returns risk could be pretty easily summarized as “save a little more, spend a little less, work a little longer, and use some of your savings to buy an annuity.”

Oh, and exercise those contentment muscles.

(You’ll note that “increase your stock allocation in order to juice your returns if you’re close to retirement and feel like you haven’t saved enough” isn’t one of the possible solutions. Read Wade Pfau’s recent piece Stocks for Retirement for some good argument and counterargument on that front.)

Further Reading:

How Your Birthdate Can Impact Your Financial Affairs and Retirement Mark Goodfield

Sequence of Returns Risk: What’s That Mean? Dirk Cotton

Retirement Ruin and the Sequence of Returns, Moshe Milevsky

You Can’t Control When You’re Born: Revisiting Sequence of Returns Risk, Wade Pfau


Sandi Martin

Sandi Martin is an ex-banker and fee only financial planner who specializes in working with regular folks who suspect their money might be a bit of a mess. She lives in beautiful Muskoka with her husband and three children, and works online and by phone with clients across Canada.

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