Most portfolios are built on a simple assumption: that equity risk will be rewarded over time. While this has generally proven true, it overlooks a critical factor — the path of returns.
For investors in or approaching retirement, the sequence in which returns occur can have a lasting impact on outcomes. Early losses, combined with ongoing withdrawals, can permanently impair the capital base. This is known as sequence risk.
Despite its importance, most portfolios do not explicitly manage this risk. Instead, they rely on diversification, asset allocation and time to recover from market declines. In practice, this often leaves portfolios fully exposed during periods of drawdown.
This creates a structural gap in portfolio construction — one where downside risk is endured rather than actively managed.
For advisers working with retirement-focused clients, this distinction is important. Managing the path of returns, not just the long-term average, can materially influence both outcomes and investor behaviour.
