3Settimana·

Sequence of returns risk ... who does that mean anything to? 🤔

To be fair, for most people here, the return succession risk will not yet play a major role. I assume that 99% of all users here (including me) are still in the accumulation phase. But since we will all be moving towards the "unsaving phase" at some point, you should at least have heard about it once!

👉🏻 So what is this ominous risk of return succession?

Basically, it describes the risk that an unfavorable sequence of monthly or annual returns can lead to worse investment results than expected. Withdrawal plans (withdrawal phase) involve the risk that the capital is used up more quickly than planned, while savings plans (accumulation phase) involve the risk that the final capital is lower than expected.

In short, a stock market crash at the beginning of a savings phase sometimes has a more dramatic effect than towards the end of a savings phase, because in order to be able to pay out the planned fixed amount, more units have to be sold than planned... and these are missing during the recovery. Conversely, a stock market crash at the beginning of a savings phase naturally has a less dramatic effect on the final capital than at the end of a savings phase.

👉🏻 Is it possible to prevent the risk of a return succession?

A resounding no. To a certain extent, it is simply luck or bad luck. You can't predict when a crash will occur. But you can at least plan for different scenarios!

It is particularly important to think in scenarios for the withdrawal phase, because if the capital is used up before the planned end, that is a disaster. At the age of 70+, it will no longer be easy to find a new job to fill the gap.

So it only helps to calculate a withdrawal plan with a sufficient buffer and to reduce the absolute withdrawal amount in the event of a crash.

A crash at the end of a savings phase is unpleasant, but if in doubt (if you're in good health) you can add another year or two of work to sit out the crash...

Are you worried about that? I have to be honest and admit that I personally hadn't thought about it until recently... but I should probably do it sometime! 😅

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29 Commenti

yieldhunter@randomdude

3Settimana

Important topic. For many reasons, the withdrawal phase is much more complicated than the accumulation phase. Unfortunately, it is not talked about half as often.

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Finanzaristokrat@Finanzaristokrat

3Settimana

Withdrawal? Cash flow is the key 🔑 for me.

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Epi@Epi

3Settimana

Super exciting topic!

Alongside the rate of return and the capital stock, the risk of return succession is the most important factor influencing the safe withdrawal rate. This in turn determines how much I have in old age and how long I have to work until I retire.
If you don't understand the risk of return succession, you may have to work 10-20 years longer 😉.

The risk of return succession and the low withdrawal rate is perhaps the strongest argument against B&H WeltETF. 3%pa is simply too low for the average person's capital.

But there are indeed ways to reduce the risk of a return chaser: smoothing the yield curve, typically through diversification across asset classes. However, as this also leads to a loss of returns, momentum strategies remain. These are particularly needed from the start of the withdrawal phase.

However, the risk of the return series has its counterpart in the savings phase: it is very low at the beginning, so that you have to take more risks at a young age so that you can reduce them significantly later and reach the optimum on average.

It therefore makes a lot of sense to manage your risk of return succession dynamically according to your age and goals!

Most people ignore the succession risk or are too comfortable to deal with it. But, as I said, it can add up to 10-20 years of your life. 😏

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CrashBurner@Psychedelic_Sunflower

3Settimana

This is one of the reasons why I have quite a high proportion of gold in my portfolio. When the stock market crashes, gold is sold first, which, according to the plan, should be enough to cover my living expenses for about 5 years in old age.

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Part_Time_Joe@Part_Time_Joe

3Settimana

@Psychedelic_Sunflower Do you have it as a certificate or also physically?

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CrashBurner@Psychedelic_Sunflower

3Settimana

@Part_Time_Joe I actually have it physically as Maple Leaf coins.

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Part_Time_Joe@Part_Time_Joe

3Settimana

@Psychedelic_Sunflower I also have a few Krugerrands, but I never actually plan to sell them. It's just a hedge for emergencies ... more of a psychological thing 👍🏼

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CrashBurner@Psychedelic_Sunflower

3Settimana

@Part_Time_Joe Never say never, but I would only sell them in an emergency. Or if I'm an old bag in retirement and have already squandered everything else 😂

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Part_Time_Joe@Part_Time_Joe

3Settimana

@Psychedelic_Sunflower or that... but that would definitely be an emergency 😂😂

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Cekay@CMustermann

3Settimana

If you want to play around with it a bit more, you can use my tool: https://wealthcalc.org/

I have built a visualizer for the RRR with basic scenario analysis based on your personal portfolio.

(I don't want to advertise, but it fits well with the post. The website is non-commercial and I earn 0€ with it, on the contrary the hosting costs).

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Charmin@Charmin

3Settimana

Interesting topic. The fact that the market drastically influences the withdrawal plan is of course evident.

But I always thought that as you approach the end of the savings phase, you would gradually shift into increasingly low-risk assets anyway.

In my planning, I "dream" of being able to cover my living costs almost entirely through rental income and dividend payments from the age of 65, and not having to touch the substance (i.e. the portfolio) at all. However, the apartments should also be completely paid off by then, and that's still a long way off ...

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TradingHase@TradingHase

3Settimana

I'll take another close look at this in 10-15 years when it's clear what (or whether 🤔) a pension will be. But there are still a few governments in between before it's worth thinking about it.

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Global I.@gloinvest

3Settimana

I'm right in the middle of it :)

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3Settimana

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Part_Time_Joe@Part_Time_Joe

3Settimana

@dividend_dynamo_2673 I would agree with that 100%. However, we are talking about deposit sizes well in excess of millions to really be able to cover your entire living expenses + buffer. This is likely to be achievable for very few people.

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