Most investors worry about market returns.
Even with a well-structured, globally diversified balanced portfolio which should yield positive returns after inflation, over most 10- and 20-year periods.
But it isn’t just about how much your portfolio grows—it’s when those returns happen.
If you’re withdrawing money regularly, like in retirement, the sequence of those returns matters a lot.
This is known as 'sequence risk'. If returns are strong early on, your pot can last decades. But if markets drop in the first few years, the impact can be brutal. Even if the average return over time is the same, the order makes all the difference.
If you’re not withdrawing money, sequence risk doesn’t apply. A market drop in year one and a market drop in year ten average out the same. But once withdrawals start, timing becomes crucial.
Why does sequence risk matter?
Imagine two investors with £1 million each invested into a global portfolio of the great companies of the world, between 2000 and 2023.
Both take out £50,000 a year to live on.
This period, which began with the tech-driven crash of 2000-2003, would have seen the portfolio rapidly depleted and eventually exhausted.
But, reversing the sequence of returns (from 2023 to 2000) would leave an investor with roughly the same amount of money as they started with.
The same average return, but with a different sequence, yields a very different outcome.
Source: Albion Strategic Consulting. Annual returns in GBP. Adjusted for UK CPI. 2000-2023. £1,000,000 portfolio drawing £50,000 at the start of each year.
Yes, this example is quite extreme—featuring a 100% equity portfolio that experiences a significant market decline at the outset, a 5% initial withdrawal rate, and no plan to adjust the amount of cash withdrawals. But it effectively highlights the risk involved.
What can investors do?
Luckily, there are ways to manage sequence risk. The key? A combination of a well-structured financial life plan and a robust investment strategy.
A solid financial life plan
A proper plan stress-tests your future against all kinds of market scenarios. What happens if you hit a downturn early on? How flexible are your spending needs?
If you can adjust your withdrawals during tough times—even slightly—you improve your odds. Cutting back in the bad years and taking more in the good ones helps smooth out the risk.
That’s why regular progress meetings with your financial life manager are so important. You need to make decisions based on what’s happening now and relate this back to your overall financial plan and ultimately, your cherished goals.
A robust portfolio
No one can control the markets.
But you can build a portfolio that spreads risk and that's grounded in a sound investment philosophy. Diversification matters—across markets, sectors, and companies.
The objective is to capture as much of the market's return as possible.
A solid portfolio helps smooth returns over time. It won’t eliminate risk, but it makes the ride less bumpy.
And by keeping financial and emotional costs low, you maximise the returns you actually get to keep.
Practical steps to reduce sequence risk
- Keep cash reserves. Having a cash buffer means you don’t have to sell investments when markets are down.
- Adjust withdrawals. Reduce spending in downturns, take more in 'up' years.
- Stay diversified. Spread risk across different asset classes.
- Rebalance strategically. Selling assets that have done well to buy those that have dropped can help smooth returns.
- Avoid panic. The worst decisions often come from emotional reactions. Stick to your plan.
The bigger picture: family wealth beyond investing
Investing is important, but it’s just one piece of the puzzle.
True financial success goes beyond market returns. It’s about structuring your entire financial life to support what really matters—your family, your lifestyle, and your legacy.
Successful families thrive when they focus on all nine domains of family wealth, not just their portfolios.
These include financial organisation, tax planning, estate planning, business interests, philanthropy, and family governance.
Getting these right helps ensure that wealth is not just grown, but protected and passed down effectively.
A strong financial life management strategy ties everything together, ensuring that money serves a greater purpose: helping families flourish for generations to come.
