Some people mistakenly believe that passive investing is the smart choice but when a retiree relies on passive investing instead of taking control as an active trader he is relying on pure luck as this segment on the sequence of returns demonstrates. Every investor should watch this.
This segment on the sequence of returns is related to the previous one on geometric averages. It is both mathematical and philosophical. Dr. James Schultz begins by introducing us to the concept of sequence of returns. He asks if the order returns come in makes a difference. He displays a theoretical example and it appears that it does not.
The real world is different though. A trader often relies upon his trading account for funds for living expenses. A retiree is counting on her nest egg to provide income. Dr. Jim shows to real world examples to show that the sequence of returns makes a HUGE difference in the real world.
The retiree who is a passive investor is relying completely upon luck. Should the first few years of her retirement see a market turn-down (like the one in Jim's example) the nest egg may not be able to provide enough over time. An active investor can take control and not have to rely upon luck.
Watch this segment of “From Theory to Practice” with Dr. Jim Schultz to learn about the importance of the sequence of your returns and why a retiree who is an active investor faces less risk than a passive investor.
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