The sequence of returns risk refers to the risk of experiencing a bear market early in the life of a portfolio, rather than later, and how that can impact the longevity of a portfolio (rate of depletion of accumulated retirement funds). This risk is typically mostly associated with a retirement (or distribution) portfolio where the investor is withdrawing money on a regular basis to fund a lifestyle.
The sequence of returns can be explained with the following example.
Following 5 people had invested Rs.10000/- each and individually got the following returns as per the table.
| Year | Person 1 | Person 2 | Person 3 | Person 4 | Person 5 |
| 1 | 42% | 6% | 4% | 2% | 40% |
| 2 | 53% | -31% | -60% | -42% | -36% |
| 3 | -5% | 56% | 74% | 70% | 48% |
| 4 | -33% | 45% | 56% | 80% | 42% |
| 5 | -16% | 64% | -36% | -48% | 43% |
| 6 | -37% | 99% | -40% | 65% | 90% |
| 7 | -30% | 84% | 65% | -18% | 8% |
| 8 | 98% | -3% | 47% | 63% | 46% |
| 9 | 40% | -73% | 50% | 79% | -38% |
| 10 | 84% | 0% | 65% | -30% | -48% |
| GeoMean | 2.61 | 2.60 | 2.60 | 2.60 | 2.60 |
| (GeoMean)^(1/10) | 1.10 | 1.10 | 1.10 | 1.10 | 1.10 |
| Sequence of Returns (SoR) | 10% | 10% | 10% | 10% | 10% |
The returns are different for different people so is the journey to reach the destination, so the valuation of Rs. 10000/- after 10 years has grown to ~ Rs. 26000/- following the above sequence of returns year on year, the same can be depicted pictorially as below,
Now from the accumulated corpus if every person withdraws 10% year on year and undergoes a sequence of returns in reverse order the graph of withdrawal would be as below.
The graph depicts that few persons have lost their accumulated corpus from 5th years onwards while some persons were able to sail through the respective sequence of return risk. Hence in short every individual has to manage their individual asset allocation to sail through this tide of a sequence of return risk which is ignored most of the time.