What Is Sequence of Returns Risk?

You’ve probably heard the advice to buy low and sell high when it comes to investing in the markets. But that’s not always going to be possible. Depending on what your investing goals are, there may be times when the opposite actually occurs.

That possibility is known as the “sequence of returns risk.” We realize your eyes are glazing over right now, but it’s an important concept to be aware of as you invest, because the market is constantly fluctuating. As a result, you could find yourself in a situation where you buy high or sell low — for instance, when you’re saving for retirement. You have to make contributions to your retirement accounts regularly or you may fall short of your goal, which means you can’t afford to wait to save until it feels like you’re getting a great deal.

So you can’t eliminate sequence of returns risk altogether, but there are ways you can mitigate it as you invest for your future.

1. DIVERSIFY YOUR PORTFOLIO

   You can’t predict how an investment will do on any given day, month or year, but you can help spread out your overall market risk by different asset classes.

   Here’s why diversification is important: If you look from year to year, you’ll see some pretty drastic swings. Let’s say you had a portfolio composed mainly of international emerging market stocks and then had to sell them during a time when that sector lost value (because you were retiring or for some other reason). You could have lost money. But another sector may have gained value that year. That’s why they say don’t put all your eggs in one basket.

2. DO YOUR HOMEWORK BEFORE MAKING ANY MOVES

   Even after you diversify your portfolio, it’s still a good to consider being proactive about opportunities to overweight (in other words, buy more of) or underweight (buy less of) certain asset classes at certain times. This can be tricky territory, however.

   If you’re unsure about which opportunities may be right for you, a financial planner or professional can help you make informed decisions about why certain asset classes may be a better value at any given time. He or she may also be able to help explain why certain investments make sense to buy or sell given the actual goals and timeline you have for your money.

3. SAVE FOR RETIREMENT, REGARDLESS

   Retirement is one of those goals for which it’s better to be doing something rather than nothing, even if it means you’ll have to occasionally buy high. Rather than spend money you should be saving simply because it doesn’t feel like the “right time” to buy, give your contributions time to take advantage of compound earnings — especially if you’re still decades away from your golden years.

Please remember that all investments carry some level of risk, including loss of principal invested. No investment strategy can guarantee a profit or protect against a loss.