Sequence of Returns: What It Means and How to Deal
The order of when things happen can be your friend or foe.
If you're a buy-and-hold investor with a long time horizon, it's helpful not to focus too much on shorter-term total returns. Despite ups and downs from year to year, what really affects your results is the long-term average over time. In fact, if you invest a lump sum in a fund and don't make any additions or withdrawals, the total returns you ultimately earn will be the same regardless of the specific order of returns from year to year.
But if you purchase or sell shares, the timing of when those returns happen becomes more important. This issue is particularly relevant during the first few years before and after retirement. When you start making portfolio withdrawals, the value of your portfolio reflects both market performance and cash outflows, which can be a double whammy during extended market downturns.