Most people consider investment returns as a benchmark for judging the performance of their portfolio. This may be especially true for retirees and pre-retirees who likely have been invested in the market for some time. That experience might have been through brokerage mutual fund investments, brokerage accounts, or even retirement savings plans such as 401(k)s or IRAs.
But the reality is that many financial concepts rely on average returns to forecast future portfolio activity. Yet compounding growth and compounding losses are the real-life factors that will potentially affect a portfolio’s value.
This is strongly exemplified in sequence of returns risk, a potential hazard for American retirees. And that doesn't apply to only retired households.
Sequence risk can also linger for soon-to-be-retirees, especially during the “retirement red zone,” that critical decade of five years before and five years after one retires.
