One of the big uncertainties facing investors is the sequence of returns they will experience in the future.
Sequence of returns refers to the order in which positive and negative returns occur over a given time period. The sequence of returns is particularly important during the period surrounding the transition into retirement when an investor moves from accumulating assets to drawing down his or her savings.
The sequence of returns poses two challenges. First, it is impossible to predict how the markets will perform over an extended period. While valuation measures, for instance, can offer insight into the prevailing long-term attractiveness or elevated risk level of the market, they cannot accurately predict how stocks will actually perform in the future. Secondly, a period of negative absolute returns or low real (inflation-adjusted) returns can adversely affect an investor’s ability to withdraw a desired amount of cash flows.