No. of Recommendations: 8
... protect it for just the first few years after retirement.
That is when sequence of returns is most critical to risk of portfolio failure.

Sounds reasonable, I came to agree with this. For a while. But after thinking about it for a while it doesn't make as much sense.

What's the crucial bit of information about the first few years after retirement? That it's the initial few years, right? But isn't EVERY few years the first years of the rest of your (retirement) life? So what makes the 1st and 2nd years any more special than the 9th and 10th years?

Thinking further, it seems to me that the big deal about sequence of return risk is that you need your portfolio to grow large enough that you don't need to fret about future volatility. Underlying presumption is that it _isn't_ large enough at first; and that you hope that it will be after a few years.

So isn't the SOR risk really just "retiring on a showstring" risk? Retire with $1M and maybe you need to be concerned about negative volatility. Retire on $2M-$3M and you can just shrug.

if you're looking at the CAGR of a time series that ended with a really stupendous month, depending on your intended use of the figures you're perhaps looking at an overoptimistic figure.

Yes. I read a paper a while ago that said you should use Excel's "slope" function or "LOGEST" instead of CAGR, because they look at all the datapoints and not just the endpoints. Here's a discussion: "To calculate the correct growth rate you need to be clear about what you want your growth rate to signify."
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.