Gilgongo wrote:I don't see much about SoR on these boards, and I get the impression elsewhere that it's more spoken about by financial advisors keen to present themselves as experts than something we should worry (too much) about.
Is that an accurate view, or is SoR something that people pay attention to (at least initially in retirement)? If so, I assume you have done something differently in the last 12 months than you did in the preceding years?
I'd never even heard of "sequence of returns risk" or "SoR" before this post of yours, let alone paid any attention to it! (At least under those names.)
After an internet search, I've discovered that it's basically a term for the fact that if you're making net withdrawals from your portfolio, you do better if markets initially rise and later fall than if they initially fall and then later rise, even if the final level of the market is the same in both cases. The risk is simply that of the markets' actually falling initially and then later rising, so that you do worse than 'central case' financial planning would suggest: if that happens to too great an extent, your portfolio can become too small after the initial years' withdrawals and market falls for the later years' market rises to keep up with the withdrawals still needed in those years, so that the portfolio continues getting smaller even when the market does start to rise again.
There is incidentally also a flip side version: if you're making net contributions to your portfolio, you do better if markets initially fall and later rise than if they initially rise and then later fall, even if the final level of the market is the same in both cases. So the risk in that case is that they actually initially rise and then later fall, so that again you do worse than 'central case' financial planning would suggest. This is of course not normally relevant to investing after retirement, so I won't address it further, beyond noting that "not normally" does not mean "never": it's possible to find yourself making net contributions in some years after retirement, e.g. after receiving a big Lottery or Premium Bond win, or a large inheritance.
Anyway, the concept was familiar to me (I'd hang my head in shame as a mathematician if it weren't!) - it's just that I'd never come across the term "sequence of returns risk" for it. I suspect it's financial-advisor jargon, and that like most jargon it serves two purposes: a positive one in that it allows insiders in the field to communicate succinctly with each other, and a rather more dubious one in that it mystifies the field to outsiders (insiders and outsiders may well differ as to whether that's positive or negative!). Your impression that it's more spoken about by financial advisors keen to present themselves as experts than something we should worry (too much) about is of course a view that the second of those is the main purpose in this case - which seems entirely plausible to me, but I've no actual knowledge about whether it's an accurate view.
As regards paying attention to sequence of returns risk, it's something I think those in retirement should pay attention to, both initially and later in retirement. But I wouldn't suggest paying attention to it by thinking "what's my sequence of returns risk?", but rather by thinking "can my portfolio deliver the future returns I will need for the rest of my retirement even if the markets suffer a bad downturn in the near future?". I.e.
hope for 'central case' returns, but
plan for reasonably bad 'downside case' returns (and for living a reasonably large number of years beyond your life expectancy - a portfolio that only lasts for your remaining life expectancy is one that runs a 50%ish chance of running out of money before you die). That's not "plan for the absolute worst", of course - the absolute worst is something like a Russian Revolution scenario that totally destroys your portfolio - but it is something along "plan for the not
too unreasonably worst" lines...
Just how much that requires one to do depends on how much in excess of one's actual needs your portfolio is. If it's only just above them, it might need careful thought about increasing its returns and/or 'belt tightening' on expenditure on even quite minor market downturns. Portfolios that are further and further in excess of one's actual needs are less and less likely to need such thought, and if they get sufficiently far above one's actual needs, the total amount of attention one needs to pay to sequence of returns risk is an occasional "Yes, my portfolio is obviously still entirely adequate even for a reasonably bad downturn" thought.
And to answer your last question, no, I haven't done anything differently about sequence of returns risk in the last 12 months than I did previously. That's because I'm fortunate enough to be in that last position and so both what I did previously and what I did in the last 12 months are both just that occasional thought. It should
not be taken as a view that others should also do nothing differently! (And it should also not be taken as saying I did nothing differently - just that I did nothing differently about sequence of returns risk. For instance, the fact that my dividend income was substantially down - but still well above adequate for my needs - did mean that I took different actions from usual about my tax planning.)
Gengulphus