What is the sequence of return risk

Imagine your cricket team is chasing a big target and loses 5 wickets early.

- Ajit Menon

Even if the middle order plays well, the team is under pressure. On the other hand, if your opening batsmen score well in the beginning, the team is not under pressure and plays with ease to chase the remaining target - the chances of winning become higher.

Let’s juxtapose this in the context of investing. Imagine 2 retirees with a similar corpus of 1 crore who begin to withdraw 5 lakh per year - 50 lakhs in 10 years.

However, at the end of 10 years, investor A has accumulated a corpus of 37.32 lakh while investor B’s portfolio grows to 58.52 lakh. That’s an absolute difference of -36% less for Investor A. How is that possible, you might wonder.

Investor A earns: -5%, -6%, -15%, -8%, -4%, 5%,7%,9%,11%, 9%. Investor B earns the same returns in reverse sequence: - 9%, 11%, 9%, 7%,5%,-4%, -8%, -15%, -6%, -5%. Investor A started investing during a bear phase while investor B begins in a bull phase. Their returns are identical but in reverse order. Investor A has earned a total amount of 87.32 lakh (50 lakh + 37.32 lakh) over this period while Investor B has earned