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Odette, a senior adviser, is coaching Zoe, a provisional relevant provider, before Zoe's first meetings with retirees. On investment risk, it is accurate for Odette to tell Zoe that … (i) sequencing risk matters most when a client is neither contributing to nor withdrawing from a portfolio. (ii) a client's risk tolerance and risk capacity can point to different investment approaches.
Statement (i) is false: sequencing risk comes from cash flows, so it matters most when withdrawals or contributions are large relative to the balance, especially around retirement (Iskra and Smark 2017, on ASIC's Exam preparation guidance v6.0 reading list). With no cash flows, the order of returns does not change the final balance. Statement (ii) is true: willingness to accept volatility (tolerance) and ability to bear losses (capacity) are separate and can conflict, as Hunt (2016) discusses; the adviser then explains the trade-off rather than ignoring either.
Without cash flows the order of returns does not matter; withdrawals are what make it matter.
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