The Four Core Investor Risks – Part 4 of 7
Timing Risk
Timing Risk–more precisely, sequence-of-returns risk–is the order in which gains and losses arrive.
A large drawdown early in the withdrawal phase of retirement can permanently impair a portfolio’s ability to sustain spending, even if the long-term average return remains respectable.
For accumulators, the risk appears as the urge to wait for a “better entry” or the failure to stay invested through volatility.
Why Sequence Matters
This risk confounds investors because it is invisible in advance and irreversible after the fact.
A 30% decline in year one of retirement followed by strong subsequent returns is mathematically far more damaging than the same decline occurring in year fifteen.
Once the sequence has played out, no amount of later outperformance can fully repair the damage if capital was withdrawn along the way.
Time in the Market vs. Timing the Market
A lot of this comes down to luck.
Markets reward time in the market far more reliably than attempts to time it; missing the best handful of days can cost more than most people realize. Yet the human instinct is to seek perfect entry and exit points.
Liquidity buffers and disciplined contribution or withdrawal rules help.
Still, any strategy that leaves investors fully exposed to equity drawdowns at the wrong moment carries this structural vulnerability.
Buffered ETFs or other forms of hedged equity exposure can help here. Lowering total portfolio volatility while still participating in equity market returns can reduce the risk of running out of money.
Key Points
- Sequence matters most in the years surrounding retirement.
- Early losses combined with withdrawals create permanent damage that later gains cannot fully offset.
- Tools that compress the range of outcomes can reduce this vulnerability.
Next in the series: Regret Risk.
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