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The order of returns matters
Two investors with exactly the same yearly returns can end with very different wealth. Why a crash early in retirement is so dangerous.
While you are only adding money, the order of returns barely matters — the average decides. Once you start withdrawing money, the order becomes critical.
$1,000,000 start, $50,000 withdrawn each year · S&P 500 calendar-year returns 2000–2025, identical returns in both lines
What happened here
Both lines use exactly the same calendar-year returns of the S&P 500 since 2000 and withdraw $50,000 every year. The only difference is the order:
- Actual order — the portfolio starts with the 2000–2002 crash, then 2008. Withdrawals during the falls lock in losses, and the portfolio never recovers.
- Reversed order — the good years come first, the portfolio grows large, and later crashes hurt much less.
Why it matters
- For anyone living off a portfolio — retirees, entrepreneurs between exits, anyone with regular withdrawals — a deep crash early on can be permanent.
- Average return is not enough. Two strategies with the same average return are not equally safe if one has much deeper drawdowns.
- This is where risk management pays the most. Limiting the depth of a crash protects the money that still has to last for decades.
Before you need the money, volatility is an inconvenience. Once you live off it, it is a threat.
Related: rule number one: survive
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