Sequence of Returns Risk — sequence of returns risk

What is sequence of returns risk?

Sequence of returns risk is a phenomenon where the order of annual investment returns matters more than their average — especially when you regularly withdraw funds from your portfolio.

Two identical average returns can produce dramatically different results if bad years fall at the beginning instead of at the end.

Why is this so important?

In accumulation phase

When you regularly contribute, early declines are beneficial — you buy cheap. Sequence risk practically doesn't exist.

In withdrawal phase (FIRE/retirement)

When you withdraw, early declines are catastrophic. You sell assets at low prices, reducing your capital base. Even if the market later recovers its losses, your portfolio no longer has anything to grow from.

Numerical example

Starting portfolio: 2,000,000 PLN. Annual withdrawal: 80,000 PLN.

Scenario A (good years first):

• Year 1: +20% → portfolio after withdrawal: 2,320,000 PLN
• Year 2: +15% → 2,588,000 PLN
• Year 3: −20% → 1,990,400 PLN

Scenario B (bad years first):

• Year 1: −20% → portfolio after withdrawal: 1,520,000 PLN
• Year 2: +15% → 1,668,000 PLN
• Year 3: +20% → 1,921,600 PLN

Identical average annual return (~3.6%), but after 3 years scenario B has 68,800 PLN less. Over 20-30 years this difference grows dramatically.

How to protect yourself?

Cash cushion

Keep 1-2 years of expenses in cash or savings account. In a bear market, withdraw from the cushion instead of selling stocks at low prices.

Bond tent / glide path

In the years immediately before and after FIRE, increase bond allocation (e.g., to 40-50%). After a few years, gradually return to higher stock allocation. This "tent" allocation protects against the worst-case scenario.

Flexible withdrawals

In bad years, cut expenses by 10-20%. A dynamic approach dramatically increases portfolio survival chances.

Additional income source

Part-time work, freelancing, passive rental income — even small income in the first years of FIRE significantly reduces sequence risk.

How Freenance can help

Freenance simulates various market scenarios for your portfolio, taking sequence of returns risk into account. You'll see how a bear market in the first years of FIRE would affect your Runway — and which protective strategies best fit your situation.

👉 Test scenarios with Freenance — freenance.io