Unit 1 · Level 2 · What risk really is
When the crash matters
Two retirees earn the exact same average return over 25 years. Anna's crash comes in year 22; Ben's comes in year 2, right as he starts withdrawing €2,000 a month. Anna cruises; Ben's portfolio may never recover, because his withdrawals kept selling shares at fire-sale prices. That's sequence risk: near retirement, WHEN the bad years land matters as much as whether they land.
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What you get asked
Who is hurt most by a big crash in the FIRST years it happens to them?
The retiree must sell into the crash to eat, locking in losses month after month. The young saver is buying the same shares cheaply; the crash works FOR them.
Put the sequence-risk trap in order
Withdrawals during a crash are panic-selling on a schedule. The lasting damage comes from being forced to sell into the fall, again and again.
Anna and Ben earn identical AVERAGE returns, yet Ben runs out of money. How is that possible?
Averages ignore order. With no withdrawals, order barely matters; with monthly withdrawals, early losses shrink the base that all later gains compound from.
For a young saver still buying every month, an early crash mainly means buying at ___ prices.
Decades from withdrawal, crashes are a discount window, not a disaster. Sequence risk flips sign depending on whether money is flowing in or out.
What's a classic defence against sequence risk as retirement approaches?
A buffer of safer assets lets you pay for the first years without selling stocks at the bottom. That's why target-date funds glide from stocks toward bonds as the date nears. 🐜
The rest of this unit
Swings, crashes, and stomachs: telling temporary pain from permanent damage.