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Sequence of Returns Calculator

Introduction

Background

Studies have shown that most of the investment returns are attributable to the allocation of your investments between asset classes, not the actual investment selection. A proper allocation involves diversification between each asset class in accordance with your risk profile and investment horizon. Investing in equities hold the promise of higher returns, but also carry more volatility from year to year.

A portfolio is most sensitive to volatility at the time of retirement, as you commence taking withdrawals from your investments. Returns during this period have a major impact on how long your retirement income will last. If you experience poor returns early on, your income will deplete faster than if you experience strong returns.

This calculator demonstrate the impact of the sequence of returns on your portfolio. You can earn the same average return, but the actual sequence greatly impacts how long your assets will last.

How it Works

The illustration shows the evolution of assets over a period of 30 years based on consecutive returns of the S&P/TSX Total Return Index over a period of five years.

The sequence of returns is repeated until all funds are depleted for each illustration. One illustration uses the actual sequence of returns, one illustration uses a sequence of returns that reorders the rates from best to worst and the last illustration uses a sequence of returns that reorders the rates from worst to best.