Same average, different order, different life

Two people stop working on the same day. Both have 100,000. Both take out 5,000 a year and leave the rest invested.

Both get exactly the same three returns, repeating: minus twenty percent, zero, plus twenty percent. Same three numbers, same average, fifteen years each. The only difference between them is which of the three arrives first.

Before reading any further, commit to an answer.

Predict

After fifteen years, how do the two portfolios compare?

Choose one answer

Identical — same returns, same average, so the order cannot matterThe bad-years-first one is a few percent behindThe bad-years-first one ends with roughly a fifth of the otherThe bad-years-first one ends ahead, having bought in cheaply

Lock in answer

Run it

The controls below hold the three returns and run them in both orders at once — worst first, and best first — against the same withdrawal.

Sequence of returns

≈ Hypothetical model, not a forecast

Runs the same three returns in their best and worst order against a portfolio being drawn down.

It assumes

• The same three returns repeat as a fixed cycle for the whole period.
• Both orderings use exactly the same three returns, so the averages match.
• The withdrawal is taken at the start of a year, before that year's return.
• A portfolio that reaches zero stays there and pays out nothing further.

It ignores

• Tax, fees and any cost of selling to fund the withdrawal
• Inflation adjustment of the withdrawal amount
• Any behavioural response, such as spending less after a bad year

Raise the yearly withdrawal until the bad-years-first portfolio runs out before the fifteen years are up — and stop before the good-years-first one runs out too. There is a band where one survives and the other does not.

Taken out each year5,000

Average return, both orders

0%

Final balance, bad years first

3,994

Final balance, good years first

22,457

Difference the order alone made

18,463

Year the bad-first path hit zero

15

Bad-first path ran out

0

Year the good-first path hit zero

15

Good-first path ran out

0

• Bad years first
• Good years first

◷ Not there yet — keep moving the controls.

That band is the whole idea. There is a range of withdrawals at which two people with identical portfolios, identical returns and identical spending end up in completely different situations, decided by which year they happened to start.

Check

Same three returns, same fifteen years, but now nobody takes anything out and nobody puts anything in. Does the order matter?

Choose one answer

Yes — a bad start is still a bad startNo — the final balance is identical whatever the orderOnly if the returns average out to zeroYes, because losses need larger gains to recover from

Check answer

The mirror image

Turn the flow around and the whole thing inverts. Someone paying a fixed amount in every year does better out of a bad start than a good one, because the early contributions buy more and the recovery applies to a larger pile.

Which produces an uncomfortable pairing. The market conditions that are best for a thirty-year-old saver are the ones that are worst for a sixty-five-year-old drawing down, at the same moment, from the same market. Two people can be correct in their opposite reactions to the same headline.

›What actually reduces this, and what only appears toOptional

Nothing removes sequence risk, because nothing removes the order of returns. A few things reduce the exposure to it, and each has a cost.

Holding some years of spending in something that does not fall with the rest means the bad years can be funded without selling into them. The cost is whatever that holding fails to earn in every other year.

Spending less in bad years does the same job for free, and requires being able to spend less, which is a fact about a budget rather than a decision.

Diversifying across things that do not fall together helps until they do, which is what track seven is about.

What does not help is a higher average return. The two paths above have the same average, and the average is not where the damage came from.

Worth remembering

• Sequence risk is the effect of the order of returns on someone who is taking money out.
• With no flows in or out, the order of returns changes nothing — the final balance is the same product either way.
• A withdrawal taken during a bad year sells more units to raise the same amount, and those units miss the recovery.
• Roughly: on the illustration here, the same returns in the worst order leave about a fifth of what the best order leaves.
• The order of returns is good for a saver paying in and bad for a spender drawing down, at the same moment in the same market.