Fun With Charts!
There are many old adages when it comes to investing. One that we like to cite is that a person’s success in the market depends on their time in the market, as opposed to timing the market. As we’ve pointed out on numerous occasions, trying to time the market – buy and sell when you believe the market will go up or down – is often a fool’s errand. Rather, the time that one stays invested in the market, through market highs and lows, will ultimately dictate success.
While we can control how long we’ll keep our funds invested in the market, we don’t get to control when markets will go up or down. In other words, there is an investment risk that revolves around the sequence of returns.
After saving for a lifetime, will the market do well the year you start retirement? And what happens if it doesn’t? Are some retirees more fortunate than others when it comes to the sequence of returns? The answer is yes.
While the sequence of returns is real and can significantly impact the quality of one’s retirement by impacting the quantity of one’s portfolio, there’s little you can do about it. While you can work longer to save more money (and delay withdrawals), you can’t predict the next great 10 years of market returns.
As the chart below1 shows, outsized investment returns (i.e., higher-than-average) when a person begins retirement can pay off handsomely.
The purple line, (the Great Start/Bad End scenario) starts with an initial investment of $1,000,000. After 30 years, to include 4% annual withdrawals adjusted for inflation, the balance is $1,592,000.
In contrast, note the green line (Bad Start/Great End scenario). Not only does the market drop during the early years, but the market drop, coupled with annual 4% withdrawal rates (adjusted for inflation), results in the portfolio running out of money less than 25 years after spending and withdrawals begin.
What doesn’t work when it comes to sequence of returns, is to run away and hide when markets turn south. Selling and moving to the sidelines is not a viable option. Sometimes, the cost of doing so can be significant.
First, there is the cost of missed opportunities, such as missing the days when markets have extraordinary returns. Second, there is often also a cost to selling existing investments, especially in a taxable brokerage account.
If you sell appreciated equities in a taxable account to convert your portfolio to ‘safe’ cash, you are likely to incur taxes on capital gains. When investments gain but are not sold, they’re not taxed because the gains are not realized. As soon as an investor sells appreciated investments in a taxable account, however, those gains are realized and taxed. (When investments are sold in a tax-deferred account, such as an IRA or 401k, those gains or losses are not reported on a tax return. Only withdrawals from tax-deferred accounts are taxable, not trading within those accounts.)
As shown below2, being out of the stock market and missing the market’s best-performing days can prove very costly. Over the period 2006-2025, if an investor stayed fully invested in the market - through the good times and bad - his/her portfolio would have achieved an annualized return of 11.0%. If that investor was out of the market during its 10 best days over that 20-year period, the annualized return would have dropped to 6.6%. That’s an extraordinary difference.
Also worth noting: “Six of the 10 best days occurred within two weeks of the 10 worst days,” demonstrating, once again, time in, is more important than timing.
1 “Sequence of return risk – Retirement spending,” Slide 27, Guide to Retirement, J.P. Morgan. December 31, 2025.
2 “Impact of being out of the market,” Slide 41, Guide to Retirement, J.P. Morgan. December 31, 2025.
S.F. Ehrlich Associates, Inc. (“SFE”) is a registered investment advisory firm in New Jersey that offers investment advisory, financial planning, and consulting services to its clients, who generally include individuals, high net worth individuals, and their affiliated trusts and estates. Additional disclosures, including a description of our services, fees, and other helpful information, can be found in our Form ADV Part 2, which is available upon request or on the SEC's website at www.adviserinfo.sec.gov/firm/summary/121356.
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