Author Topic: Sequence of Returns Risk  (Read 1412 times)

dude

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Sequence of Returns Risk
« on: January 12, 2018, 09:40:26 AM »
Lake161, in this thread: https://forum.mrmoneymustache.com/post-fire/how-do-you-factor-social-security-into-your-withdrawal-stategy/, shared this really interesting website: https://earlyretirementnow.com/2017/05/17/the-ultimate-guide-to-safe-withdrawal-rates-part-14-sequence-of-return-risk/, which has a super interesting couple posts re: Sequence of Returns Risk. In particular the zero-sum nature of the risk as between savers and retirees, and how SRR, which we normally associate with the withdrawal phase, has just as important implications in the accumulation phase. Which got me to looking at how my main (401k) account has fared over the past 19 years (when I started saving/investing). Here's my sequence of returns:

1999: 20.95%
2000: -9.14%
2001: -11.94%
2002: -22.05%
2003: 28.54%
2004: 10.82%
2005: 7.65%
2006: 14.82%
2007: 6.98%
2008: -28.69%
2009: 21.6%
2010: 14.26%
2011: -0.91%
2012: 13.74%
2013: 20.81%
2014: 6.26%
2015: 1.81%
2016: 8.43%
2017: 13.78%

Average return = 6.2%

I can see now that in those three early, losing years (2000-2002)* I was buying stocks at a bargain and have had overwhelmingly positive returns since then (positive returns in 13 of 15 years, double-digit returns in 7 of those). Pretty indicative of a very beneficial Sequence of Returns in the accumulation phase, I'd say.  What that means going forward is anybody's guess, but of course, I do fear the dreaded SRR early in my retirement years. So I'll be keeping a cash reserve on hand to try to weather any bear market early on; just have to keep hoping that we don't become Japan over the next 10 years . . .

Anyway, for those who haven't seen the earlyretirementnow.com website (I hadn't until today), I thought it would be a good share.

* I'd only invested $1600 in year one (1999); over the next three, I'd invest over $21,000 (not incl. matching contributions).

2Birds1Stone

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Re: Sequence of Returns Risk
« Reply #1 on: January 12, 2018, 09:46:35 AM »
Does this imply that those of us who did the bulk of our accumulation during the last bull market have more to worry about?

daverobev

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Re: Sequence of Returns Risk
« Reply #2 on: January 13, 2018, 07:41:33 AM »
Does this imply that those of us who did the bulk of our accumulation during the last bull market have more to worry about?

Everything is a blend, right? If you go for 4% based on your last day of working, which happens to coincide with the Top, and you are invested in such a way that you don't hold bonds or anything other than (I assume) US stocks, AND the US market goes into decline for 5-6 years...

That's pretty unlikely. I am thinking I'll be using the variable withdrawal system, so that in bad stock years I'll reduce drawdown.

The stats, I guess, say "probably not" (having more to worry about) *statistically* - you're not likely to run out of money over the 30 year span. But, *emotionally* you retire - you pull the plug - when you have JUST hit 4% SWR and are LEAN FIRE? Your portfolio drops ~30%? I'd worry.

(Edit: Alas, I am a worrier, so I'll probably worry no matter what. In fact, I'm worrying already because the market seems to only be going up up up which is scary when you look at the CAPE ratios.... eh... etc. Problem is, TINA - what else are you going to invest in?)
« Last Edit: January 13, 2018, 07:43:18 AM by daverobev »

2Birds1Stone

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Re: Sequence of Returns Risk
« Reply #3 on: January 13, 2018, 09:32:11 PM »

Everything is a blend, right? If you go for 4% based on your last day of working, which happens to coincide with the Top, and you are invested in such a way that you don't hold bonds or anything other than (I assume) US stocks, AND the US market goes into decline for 5-6 years...

That's pretty unlikely. I am thinking I'll be using the variable withdrawal system, so that in bad stock years I'll reduce drawdown.

The stats, I guess, say "probably not" (having more to worry about) *statistically* - you're not likely to run out of money over the 30 year span. But, *emotionally* you retire - you pull the plug - when you have JUST hit 4% SWR and are LEAN FIRE? Your portfolio drops ~30%? I'd worry.

(Edit: Alas, I am a worrier, so I'll probably worry no matter what. In fact, I'm worrying already because the market seems to only be going up up up which is scary when you look at the CAPE ratios.... eh... etc. Problem is, TINA - what else are you going to invest in?)

Hey, I hear you.

I'm pretty much planning to LEAN FIRE when I get to $24k/yr at 4% WR.

And I actually plan to take a year off when I get to 5% WR to test the waters.

If stock market goes kaput before or during that time (2020) I am more than happy to go back to work for a few more years longer to get my withdrawal amount back up to a comfortable level.

soccerluvof4

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Re: Sequence of Returns Risk
« Reply #4 on: January 14, 2018, 03:23:46 AM »
Does this imply that those of us who did the bulk of our accumulation during the last bull market have more to worry about?

Everything is a blend, right? If you go for 4% based on your last day of working, which happens to coincide with the Top, and you are invested in such a way that you don't hold bonds or anything other than (I assume) US stocks, AND the US market goes into decline for 5-6 years...

That's pretty unlikely. I am thinking I'll be using the variable withdrawal system, so that in bad stock years I'll reduce drawdown.

The stats, I guess, say "probably not" (having more to worry about) *statistically* - you're not likely to run out of money over the 30 year span. But, *emotionally* you retire - you pull the plug - when you have JUST hit 4% SWR and are LEAN FIRE? Your portfolio drops ~30%? I'd worry.

(Edit: Alas, I am a worrier, so I'll probably worry no matter what. In fact, I'm worrying already because the market seems to only be going up up up which is scary when you look at the CAPE ratios.... eh... etc. Problem is, TINA - what else are you going to invest in?)
Does this imply that those of us who did the bulk of our accumulation during the last bull market have more to worry about?

Everything is a blend, right? If you go for 4% based on your last day of working, which happens to coincide with the Top, and you are invested in such a way that you don't hold bonds or anything other than (I assume) US stocks, AND the US market goes into decline for 5-6 years...

That's pretty unlikely. I am thinking I'll be using the variable withdrawal system, so that in bad stock years I'll reduce drawdown.

The stats, I guess, say "probably not" (having more to worry about) *statistically* - you're not likely to run out of money over the 30 year span. But, *emotionally* you retire - you pull the plug - when you have JUST hit 4% SWR and are LEAN FIRE? Your portfolio drops ~30%? I'd worry.

(Edit: Alas, I am a worrier, so I'll probably worry no matter what. In fact, I'm worrying already because the market seems to only be going up up up which is scary when you look at the CAPE ratios.... eh... etc. Problem is, TINA - what else are you going to invest in?)


That was kinda my plan as I didnt start accumulating till later in life and wasnt forced but retired because I was self empoyed and done so it came quick. I worried alot early and while over the last 3 years I have covered my withdrawal and buildt about a 5 year cash stash to buy in if things go on sale and or two get through lean times I have it. This run up though had taken me to closer to 33xs and I am 3 years older. But back in my mind I still to think worse case I can get a nothing job part time to help through those down years. The longer I make it in retirement hopefully those odds go down as I was one that put most of my money in the market when the Dow was at 16,000 so right or wrong that brings me some worry as I see doomsday always when it comes to money things but that to I am getting better at with age as I become more educated and better planned. A japan like situation for 10 years would be dreadful however.............shhh dont say that!

Monkey Uncle

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Re: Sequence of Returns Risk
« Reply #5 on: January 14, 2018, 02:40:57 PM »
A japan like situation for 10 years would be dreadful however.............shhh dont say that!

It has already happened in the U.S. three times: 1929-1945, 1968-1982, and 2000-2012.  I guess our experiences were a little different in that there were a lot of ups and downs during those time frames, but the effect was the same as Japan's lost decade (i.e., zero real return over those time periods).

(Years estimated off the graph shown here: https://earlyretirementnow.com/2017/12/13/the-ultimate-guide-to-safe-withdrawal-rates-part-22-endogenous-retirement-timing/)

Bateaux

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Re: Sequence of Returns Risk
« Reply #6 on: January 14, 2018, 05:00:49 PM »
I'm really hoping for the next crash soon.  I'd love to see 2018 and 2019 as down years then recovery in 2020.  Would work nicely for FIRE in 2020.

BTDretire

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Re: Sequence of Returns Risk
« Reply #7 on: January 14, 2018, 06:34:05 PM »
I'm really hoping for the next crash soon.  I'd love to see 2018 and 2019 as down years then recovery in 2020.  Would work nicely for FIRE in 2020.

 What?
You would like to see a couple 10% down years?
Does that mean you have a stache of cash to put in the market?
 $1M down 10% for two years leaves you $810,000.
A good 2020 with a 20% return gets you back to $972,000.
I guess if you invested more than $15,000 each year, but
If you have The 1M and the market increases Just 10% each year,
you would have $1331,000 and any savings is gravy on top of that
plus growth.
 Please stop wishing my money away! :-)
« Last Edit: January 14, 2018, 06:47:04 PM by BTDretire »