Lesson 2 of 3 · 8 min
The order bad years arrive in
Two people can earn the same average return over the same period and run out at different times. Once you are withdrawing, the sequence stops being neutral.
Here is a fact that surprises almost everyone. While you are only adding money, the order in which good and bad years arrive makes very little difference to where you end up. Reverse the sequence entirely and the final figure is close to identical. The moment you start taking money out, that stops being true.
The reason is not complicated. A withdrawal in a bad year sells more units to free up the same rupees, so those units are gone before any recovery arrives. The corpus has less left to recover with, and the loss is locked in by the act of spending rather than by the fall itself. A bad year at the start of retirement therefore costs far more than the same bad year twenty years in.
| Phase you are in | Does the order of returns matter? | Why |
|---|---|---|
| Adding money each year | Barely | Nothing is sold, so a fall is only ever unrealised |
| Neither adding nor taking | No | The arithmetic is commutative when nothing moves in or out |
| Taking money each year | A great deal | A withdrawal in a fall sells more units, and they do not come back |
Put these in order
Put these in order of how much damage a 20% fall does, most damaging first.
- Twenty years before withdrawals begin
- The last year before withdrawals begin
- The tenth year of withdrawals
- The first year of withdrawals
Check yourself
1 / 3
Kabir asks
While you are still adding money, how much does the order of returns matter?
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