Sequence of returns risk

For a lump sum held without contributions or withdrawals, rearranging the same periodic returns does not change the ending value before costs and taxes. Contributions and withdrawals change that result. Once you are withdrawing, a market decline early in retirement can require selling more shares at low prices to meet spending. Those shares are gone before a potential recovery.

For an owner who has just converted a business into a portfolio, the first years after the sale are the window where this risk is most concentrated.

Common approaches include keeping a reserve of several years of planned spending in steadier holdings, using flexible spending rules that trim withdrawals after a decline, staggering bond maturities to match near-term needs, and timing some sources (such as Social Security) to reduce early withdrawals from the portfolio.

None of these eliminate risk, and each has a cost, often in the form of lower expected long-term growth. The goal is a plan that you can actually follow through a bad market without abandoning it.

Owners are used to controlling outcomes. Watching a portfolio drop without being able to call a meeting and fix it can be harder than expected. Deciding in advance what you will do in a decline is part of the plan.