Same average returns, very different outcomes — the order matters

Imagine two retirees who each start with $100,000 and earn the exact same two returns — one year of −20% and one year of +25% — while withdrawing $10,000 at the end of each year. The only difference is the order. Retiree A hits the bad year first: the portfolio drops to $80k, minus $10k is $70k, then grows to $87.5k, minus $10k leaves $77,500. Retiree B gets the good year first and ends with $82,000. Identical returns, identical withdrawals — $4,500 apart, and the gap widens over a real retirement.

This is sequence-of-returns risk: when you're withdrawing money, the order in which good and bad years arrive changes your result. Early losses are especially punishing because you're selling shares at low prices to fund withdrawals, leaving fewer shares to recover when markets bounce back.

Here's the counterintuitive part: if you never touch the money, order is irrelevant. Multiplying 0.8 × 1.25 gives the same answer as 1.25 × 0.8 — a buy-and-hold portfolio ends in the exact same place no matter the sequence. The danger appears only once cash is flowing out (retirement) or steadily in (regular contributions). That's why the years right around retirement are often called the 'fragile decade.'