053 Timing Risk, It’s More Serious Than You Think

(Complete Show Notes Below)


In the 53rd episode of the Financial Procast:

Is Timing Risk All About The Whims of the Stock Market?

Most of us think that timing risk has everything to do with a buy low, sell high sort of discussion and our goal is to maximize our overall rate of return.  But truthfully there's more to it than that.  Timing risk is applicable to more than just rate of return, it really pertains to the fluctuation or variability of your assets.  Think about this for a second, if you buy assets at a set price and the market (whatever market it may be) has a correction or adjustment, think 2000-2001 or more recently 2008.  The markets typically come back but there was, in both cases, a significant depreciation of your assets.

This poses a problem.

There may be things that you want or need to do with your money during that time but you are hesitant to do so for obvious reasons.  Unfortunately, the advice that most  financial advisers will give their clients (even us in a past life) is “Well, you have lost anything unless you sell, it's just a paper loss”.  True…kind of.

That line of thinking works if you don't actually believe in mark to market asset valuation.  But for the rest of us that live in the real world where the market value of our assets is all that really matters, watching our assets lose value in a particular market is a very real thing.

Think about the real estate crash of the past several years.  If you went to your banker and wanted any kind of equity loan on your house, what would he look at to determine if the loan makes sense?  Well, of course he's going to look at your credit, your earnings, and finally he's going to look at the market value of your property.  You can argue all day that you paid $300,000 for your property but if the market value is $250,000 that's the number he's going to use to determine your eligibility.

The variability of markets can significantly alter your ability to seize opportunities as they arise. And it becomes even more important when you are looking at your retirement assets.

You Can't Control the Order of Returns

Averages are fine to look at but please make sure you understand the difference between average annual rate of return and compound annual growth rate.  A good starting point is to look at this post to make sure you fully understand the difference:

Compound Annual Growth Rate vs. Average Annual Rate of Return: Wall Street's Greatest Sleight of Hand

The Methodology Behind “Average” Rate of Return

After you've looked at that you should go back and look at this post:

Why Life Insurance Works So Well for Retirement Income

Which is the basis for the analysis discussed in this episode.  You'll notice that depending on the order of returns, you run out of money before you planned despite the fact that the rate of return is identical.  If you get hit with a huge decline in the early years of your retirement withdrawals,  timing risk becomes very real to you.

As you can see, that rate of return will not do anything for you if you don't mitigate your losses or control the order of returns you receive.  Hopefully, you just grasped the absurdity of the second part of that statement.

What market sensitive investment gives you control over the order of your returns?  If you could predict market returns, you probably wouldn't care less about anything that we have to say.  Can you place your rate of return exactly where you want it over the next 20 years?  That would be a useful skill.

You'd always stack your best returns at the beginning of the period in descending order.  But you can't control that obviously so the only thing you can control is the ability to mitigate the loss.

So what about savings bonds…could that be the answer?  hahahahahahaha…funny right?  You definitely mitigate losses but the rates are a bit too low to even consider them a viable alternative.

What about life insurance? Could it work?


Well, Brandon proved that whole life insurance could work for sure but we had a reader write us with a question about using universal life?  And more specifically indexed universal life insurance (IUL).

With IUL you have a miniumum (0%) and a maximum (10%) as an example.  Without getting too deep in the weeds here in show notes, just know that your credited interest rate in an IUL is tied to the movement of an index.  If you want more detail on how it all works…listen to the podcast!











4 Responses to “053 Timing Risk, It’s More Serious Than You Think”

  1. Dean Patino says:

    Thanks for the great education on timing risk Brantley. As a top 5 percent income earner I learned here it dramatically negatively impact the money I invest in retirement if it gets nailed by a negative annual yield streak early on, of which I have no ability to control let alone for see. A wise tip on Life Insurance, one that hasn’t crossed my mind before. Definitely makes me feel much more secure about retirement in my future knowing there is a much safer vehicle out there to protect my finances from risk. Appreciate your wisdom on this topic!

  2. Jeff Hexter says:


    When I first was exposed to this important concept, it was shown to me as the fallacy of averages when negative numbers are involved (when you average negative rates of return in with positive rates of return, you can get a positive average rate of return yet still have less money than when you started)

    I was never shown how the order of the annual rates of return matters, which is such an obviously unknowable trait, and it makes such a huge impact on the growth of an investment!

    I recently got into a discussion with one of my financial planners along these lines (the standard “I suggest we take the money from this insurance policy and invest it, while we buy a term policy to cover your needs until a certain date – we can get a better rate of return on the investment”) and I totally forgot about this argument.

    Great job guys! My apologies for my absence of comments on your blog and podcasts. Please know that I have been reading or listening to EVERY ONE and learning a ton. It was just a hectic summer with less free-time than I anticipated.

    All the best,


    • Brandon Roberts says:

      Hey Jeff,

      Thanks for letting us know and thanks for the little story.

      Your summer’s been busy? Ours too…ridiculously so.

  3. Steve Young says:

    Wow as someone who’s not really knowledgable in this space, this is some great content!

    Keep up the great work guys!

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