It’s a reality that the majority of retirement savings sits in “at risk” investments. And while the market may AVERAGE a certain return over time, it’s the actual SEQUENCE of returns that is of concern.
Market “averages” can be misleading as well. Consider the following example:
- You have $100,000 to invest
- Year 1: You make 100%, ending the year with $200,000
- Year 2: You LOSE 50%, ending the year with $100,000
- Year 3: Another 100% gain and you’re back to $200,000
- Year 4: Another 50% loss and you’re back at your original $100,000
Think about it: You started 4 years ago with $100,000, and today you still have $100,000. But:
- If you total the market returns (+100, +100, -50, and -50) you end up with +100. Divided by 4 years, that would give you a 25% AVERAGE return. This is why we don’t rely on “averages.”
- A 50% loss requires a 100% gain just to come back to even.