Sequence of returns risk
The risk that the same average return produces a different outcome depending on the order of good and bad years. It appears wherever money is added or withdrawn regularly.
How to read the number
A portfolio nobody touches is indifferent to order: a product of factors does not change when they are rearranged. Add contributions or withdrawals and the order starts to decide the result.
When the metric lies
An average return over the period hides this risk completely. Weak years early in the withdrawal phase shrink the base the later recovery works on, and the portfolio never catches up with the arithmetic done on the average.
Also known as: sequence risk