One of my favorite rituals for the past few years has been blocking out five days from my calendar in the fall to go elk hunting. After back-to-back victories in my first two seasons, I assumed I had found my calling and that the years ahead would follow a simple script: enjoy nature, bring home a full freezer, and repeat. I couldn’t have been more wrong.

I didn’t get anything in my third year which I chalked up to nature needing to win sometimes. Last year, the only elk I saw were a kilometer away. This year, I’m already getting anxious and it reminded me how timing shapes both hunter morale and investor outcomes.

Averages & Context

One of the most important things in life is learning how to set expectations and we often do that by trying to determine whether our situation is average. This is what I’ve done with my elk hunting experience. Using public Oregon Department of Fish and Wildlife data, if a rifle hunter is hunting on private land they should have a 40% chance of harvesting an elk in any given year, which means over a five-year period of time a hunter should expect to harvest two elk. The numbers say I’m doing well even if my 2025 hunting season ends with an empty freezer.

We can perform a similar exercise to establish context when looking at global stock market returns. Over the past 55 years, a globally diversified portfolio has had a gross average return of 11.8% (before fees, taxes, and inflation). However, I think the distribution chart below shows that averages can be spectacularly misleading. While we should expect a positive return nearly 80% of the time, there are plenty of years when we can expect our returns to be significantly above or below the average year. That variability is harmless while we’re adding money, but is risky when we start withdrawing.

Source: 30% MSCI EAFE Index (net div.), 70% S&P 500 Index. Total Return in USD

Sequence-of-Returns Risk

We can take building context a step further by examining how happiness and investor success can be influenced by the sequence-of-returns. Sequence-of-returns risk shows that when returns arrive matters as much as how big they are, particularly once you start withdrawing money in retirement. Think back to my hunting experience: same hunter, same ranch, but a very different mood depending on when success happened.

If you are like me and believe that investment returns are relatively random, then sequence-of-returns exercises show us plausible alternative history scenarios. They show us how vulnerable our sense of well-being is, not only to the long-run average, but to the sequence in which we experience it.

Let’s look at our own sequence-of-returns example in the chart below. Imagine two retirees who both start 2000 with $1 million and withdraw $40,000 at the start of every year. In the blue line (“Real”) they live through the actual S&P 500 returns from 2000-2009. In the orange line (“Reverse”) they experience those exact same annual returns, just in the opposite order.

Source: MacroTrends.net - Performance is calculated as the % change from the last trading day of each year from the last trading day of the previous year.

Both investors earn the same average return over the decade, yet they finish with noticeably different balances. That gap is created entirely by timing—early losses lock in withdrawals at depressed prices, while early gains provide a cushion.

Behavior and Risk Reduction

Understanding sequence risk helps us manage the behavioral risks that derail both hunters and investors. For an elk hunter, sequence-of-returns risk takes the form of being unsuccessful for your first three years of hunting and giving up. That person will never experience the joy of a successful hunt, providing food for their family, and being close to magnificent creatures. For an investor, a series of negative returns may encourage them to give up on the enterprise altogether, go to cash, and face permanent impairment in their portfolio because they will not be participating in the eventual upswing in markets. Yes, there are down years, but history’s long-run distribution tilts decisively positive.

Now, we can increase our odds of capturing positive events and reduce our chances of successive negative events by using diversification. In elk hunting, we increase our odds of harvesting an elk by hunting more often and in more parts of the country, but this is an expensive solution. Fortunately for investors, diversification is inexpensive to include in your portfolio and can lead to better results. Below is our same investor starting with $1,000,000 in the year 2000 and withdrawing $40,000 at the start of each year, but this time I’ve added a globally diversified portfolio and a portfolio invested sixty percent in global stocks and forty percent in bonds.

Real S&P: MacroTrends.net - Performance is calculated as the % change from the last trading day of each year from the last trading day of the previous year.
Real 100 Global: 30% MSCI EAFE Index (net div.), 70% S&P 500 Index. Total Return in USD.
Real 60/40 Global: 18% MSCI EAFE Index (net div.), 42% S&P 500 Index, 40% Lehman Brothers US Government/Credit Intermediate Index. Total Return USD.

As you can see in this scenario, adding diversification not only reduces volatility, but results in a higher total portfolio value at the end of ten years. To be fair, this is a cherry-picked scenario to highlight the benefit of being diversified across nations and asset classes. If we were to extend this graph, the US investor would experience US outperformance over other markets in the years after the Global Financial Crisis. But that’s the trade-off: diversification smooths the ride so we stay invested long enough to capture those positive stretches. After all, the next bull—or bull market—might be just over the ridge.