A fixed deposit barely moves in value. Where is its risk hiding?

In buying power leaking to inflation for as long as the money sits there

Nowhere — a flat line means there is nothing to worry about

In the bank changing the contracted rate part-way through the term

When does the ORDER of good and bad years start to matter, rather than just the average?

Once money is flowing out of the corpus

While you are still adding money every month

Only when the average return over the period is negative

Lesson 2 of 3 · 7 min

Volatility, risk, and the order of returns

Wiggling is not the same as losing, and once money is flowing out of a corpus, the order of the good and bad years matters as much as the average.

Volatility is how much a price wiggles. Risk is ending up without the money when you actually need it. They are not the same thing.

A fixed deposit barely wiggles, yet it can quietly lose buying power to inflation for a decade. Equity wiggles violently, yet a fall only becomes a real loss if you have to sell during it. What connects the two is time: the sooner you need the money, the more the wiggle matters.

Now a subtler idea. Once money is flowing OUT of a corpus, the ORDER of good and bad years starts to matter — not just the average. That is sequence risk, and it is invisible in an "average return" figure.

A bad year early in a withdrawal phase forces you to sell more units cheap, and the corpus never gets to enjoy the good years that follow.

Same two years, opposite order: ₹10 lakh, withdrawing ₹1 lakh each year-end

Identical returns, identical withdrawals — only the order differs. Bad year first costs ₹45,000. Stretch this over 25 years of retirement and the gap decides whether the money lasts.
Where things stand	Meera: −20% first, then +25%	Arjun: +25% first, then −20%
After year 1	₹10L → ₹8L, minus ₹1L = ₹7,00,000	₹10L → ₹12.5L, minus ₹1L = ₹11,50,000
After year 2	₹7L → ₹8.75L, minus ₹1L = ₹7,75,000	₹11.5L → ₹9.2L, minus ₹1L = ₹8,20,000
Total growth over 2 years	0.80 × 1.25 = exactly 1.0 — flat	1.25 × 0.80 = exactly 1.0 — flat
End result	₹7,75,000	₹8,20,000 — ₹45,000 more, same returns

Same returns, same withdrawals — how do they end up apart?

KabirTara

Kabirasking
Hold on. Meera and Arjun earned the same two returns and took out the same money each year. How do they not finish level?
Taraexplaining
Because Meera withdrew out of a shrunken pot. Her fall came first, so that year's withdrawal took away units at a low value — and those units were gone before the good year showed up.
Kabirasking
So the good year had less left to work on.
Taraexplaining
That is the whole thing. Growth is a percentage of whatever survived. Arjun's good year landed on a full pot, and his bad year hit a pot he had already grown.
Kabirasking
That feels unfair. Same numbers, different luck.
Taraexplaining
It is luck, and nobody gets to order the years. What you can notice is when the order starts to matter: while you are only adding money it barely counts, and once money is flowing out it counts a great deal.

Quick check

When does sequence risk bite hardest?

Just for you

Think of the next big expense in your life. If the money for it fell 30% the month before, what would that do to your plan?

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Kabir asks

The lesson holds volatility and risk apart. What is the difference between them?

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