New and soon-to-be retirees can minimize the “sequence of returns risk” by adjusting both their portfolio and their investing mindset. Investors who don’t manage this risk might wish they’d paid more attention to the old Aesop’s fable about the farmer who had a goose that laid one golden egg each day.
If you don’t remember that one, I’ll cut to the chase: Instead of thinking about how he could best protect his goose – and the comfortable lifestyle it provided him – the farmer decided he wanted to get more eggs faster. So he ended up gutting the goose … and a heck of a retirement plan.
The moral of the story – “those who have plenty want more, and so lose all they have” – could serve as a cautionary tale to anyone, young or old, who chooses to invest aggressively despite the potential for big losses. But it’s particularly relevant, I think, for new and soon-to-be retirees, who are more vulnerable to something called “sequence of returns risk.”
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That’s because once you retire and start taking regular withdrawals from your investment portfolio, annual market returns become key to maintaining a reliable income stream. If your stocks experience a significant loss in value because of a correction or crash, and you find yourself having to sell more shares to generate the income you need, it can affect how long your retirement savings will last.
And if that loss comes early in your retirement, or just before you retire, the unfortunate timing could end up killing the goose you’re depending on for a steady flow of golden eggs – even if your portfolio’s “average” rate of return is favorable.
