How Investors Nearing Retirement Can Navigate Market Anxiety
As I write this on Monday, April 7, 2025, the repercussions of U.S. President Trump’s tariffs continue to roil the stock market. Many readers, especially those in their 50s, 60s, and older, who have likely accumulated significant investment assets over their lives, are probably down 10s of thousands, if not 100s of thousands of dollars just in the last few days. This is a hard pill to swallow. What can we do?
Acknowledge the Anxiety
Investors, especially those nearing retirement, are likely to feel more anxious during uncertain times. A couple of years ago we were dealing with inflation. Now that the rate of price increases has returned to normal, we are dealing with a new reason for market volatility, this time largely as a consequence of the unfounded beliefs of the president of the most economically powerful country in the world. We don’t know how or when this is going to end. The first thing we need to do, then, is simply to recognize that we are anxious about this situation.
Reassurance
It’s normal to feel worried when your financial future feels uncertain. However, taking a thoughtful approach can help mitigate these concerns. As Jesus is recorded as saying, “Can any of you by worrying add a single hour to your span of life?” (Matthew 6:27).
Setting the Tone
This blog post, inspired by the Kitces and Carl podcast episode 160, “Calming Clients With Anxiety About Trump Tariffs and Trade Wars,” will offer some practical advice for managing market-induced anxiety, staying focussed on long-term goals, and navigating the emotional ups and downs that come with investing.
I. Understanding the Emotional Challenge of DIY Investing Near Retirement
The Transition to Retirement: For many investors, the years leading up to retirement are loaded with uncertainty, especially if you’ve done your investing without professional guidance. Common concerns are: “Is my portfolio ready for retirement?” “Will I run out of money?” “What if the market crashes before I retire?” If you are planning to retire this year, that last question can be particularly relevant.
The Emotional Toll: Because risk is inherent in investing, it is all but impossible to avoid some degree of stress, but the potential for permanent loss is felt even more keenly when retirement is imminent.
How Worry Builds Up: Worry often builds up quietly but steadily, especially when retirement is near. A sudden drop in the stock market, a headline warning of a looming recession, or a news story about inflation eating away at savings, can all act as emotional triggers. Even if your plan is sound, the financial news can stir up doubts. For the DIY investor, there’s often no one available to offer a reassuring second opinion. The tendency to react impulsively to that kind of worry is not surprising, but doing so can lead to decisions that undermine your long-term goals. The fact that you feel anxious is not in itself a useful indicator that something is wrong with your plan. It may, however, be a sign that you should take the time to pause, review your plan, and then respond thoughtfully with the long term in mind. Fear over the uncertainty you are experiencing is natural, but fear doesn’t have to drive your decision-making process.
II. Assessing Your Financial Plan: Is It Ready for Retirement?
Understand Your Goals: Before acting on any feelings of anxiety, review your retirement goals. What are your needs and priorities for retirement? Some important questions to ask yourself are:
- Do I have enough saved for the lifestyle I want in retirement?
- What is my expected retirement income from all sources, and will it meet my needs?
- Have I considered potential healthcare costs, taxes, and unexpected expenses?
Stress Test Your Plan: Use financial tools to simulate different market conditions and see how they impact your goals. Monte Carlo simulations and financial projections can help illustrate potential outcomes, helping you better understand what to expect during market downturns. Some tools are available online, but they may have drawbacks like being designed for US investors or being overly simple. One Canadian tool that you may find useful is the Canadian Retirement Income Calculator offered by the Government of Canada.
III. Avoiding the “Buddhist Second Arrow” Problem
The “Buddhist Second Arrow” Problem was something mentioned by Carl Richards. Despite several years in Japan and studying Japanese religions, which included Buddhism, I had never heard of this problem. Evidently, it comes from early Theravada Buddhism, not the Mahayana Buddhism that predominates in Japan.
The First Arrow: The first arrow is the event that causes stress, in this case, a sudden, dramatic market downturn. This is the objective loss. It’s important to recognize that you cannot control external events.
The Second Arrow: The second arrow is your reaction to the first, worrying about missed opportunities or fretting over the decision to sell. This is the subjective loss, i.e., the anxiety-inducing fear of further loss, and the self-recrimination of “I should have seen this coming.”
What to Do Instead: This “parable” invites us to acknowledge the temptation of succumbing to the second arrow problem without reacting emotionally. Instead, it’s time to return to your Investment Policy Statement and your investment goals.
IV. Using Historical Data and Market Trends to Provide Perspective
Understanding Market Volatility: Investors often feel anxious when the market drops. It’s important to recognize that downturns are a natural part of market cycles and that the risks associated with investing come in all forms, including regulatory and legislative risks.
Data to Ease Anxiety: It may be helpful to look at past market drops and recessions. Consider the 2000 dot-com bubble, the global financial crisis of 2008, the short-lived but steep market drop from COVID-19 in 2020, and the inflation-driven downturn of 2022. Although the dot-com bubble took many years to recover based on the value of the NASDAQ, in other cases, markets have rebounded quickly and strongly after a downturn.
Having said that, if you’re nearing retirement, it will be important to assess how your portfolio might behave during a bear market and whether you can tolerate a steep loss. You may wish to reduce your risk level in the year or two before retirement and in the first two or more years of retirement so that you are not drawing from investments that have the short-term potential for a major loss. Although many investors dislike GICs because they are locked in until maturity and typically do much less well than equities, having that kind of secured income with a portion maturing each year before and in retirement may help you stay invested when there is volatility.
To put it more straightforwardly, make sure your portfolio is diversified to limit the risk of permanent loss while simultaneously allowing it to grow over the long term.
V. Evaluating Risk Tolerance and Adjusting Your Investment Strategy
What Is Your Risk Tolerance at This Stage? As suggested above, as you approach retirement, your risk tolerance may shift. Understanding where you stand on the risk spectrum is essential. While younger investors can take on more risk, those nearing retirement typically want a more conservative portfolio. This doesn’t mean avoiding all risk; it means adjusting your asset allocation to match your circumstances. If you have not done so before, a good tool to start with is Vanguard’s Investor Questionnaire. It will suggest a balance between stocks and bonds (equities and fixed income) that you are, of course, free to adjust or ignore.
Rebalancing for Retirement: Rebalancing your portfolio may involve shifting from equities to fixed-income or cash-equivalent holdings, depending on your goals and risk tolerance. Consider reducing the proportion of stocks in your portfolio and increasing your allocation to bonds or other lower-risk assets as you approach retirement age. Even in retirement, however, you should still invest with the potential for growth in mind. After all, 65-year-old retirees may still have 30 years or more of life ahead of them.
VI. Staying the Course: Why It’s Important to Stick to Your Plan
The Challenge of Timing the Market: Attempting to time the market is one of the most difficult things to do successfully. Actually, that’s probably understating the situation. Even highly paid professionals find it all but impossible to accomplish, which is why many investors have simply decided on an asset allocation mix, invested in an appropriate index fund or funds, and let the markets run their course.
In the fall of 2008, markets were tumbling like we have been seeing in recent days. I was serving the “active investor” category, people who had a big appetite for risk, but who wound up destroying most of their wealth with overly risky strategies using options and margin. They didn’t time the market correctly. However, by March of 2009, the bottom had been reached, and those with thoughtful long-term investment strategies had been regularly buying all through the downturn and were once again beginning to see their portfolios grow.
The Benefits of Staying Invested: To summarize the paragraph above, like 2008-2009, historical data shows that, over time, staying invested in a diversified portfolio tends to lead to better results than trying to time the market. As the investing adage goes:
“Time in the market beats timing the market.”
If you’re tempted to sell during a downturn, ask yourself:
- Have your long-term goals changed?
- Is your portfolio still aligned with your retirement timeline and risk tolerance?
VII. Steps for Investors to Take Now
Reassess Your Retirement Plan: Take stock of your savings and investments. Are you still on track for the retirement you envisioned? Adjust your strategy if necessary.
Assess Your Income Streams: Do you have additional sources of income outside of your investment portfolio: e.g., CPP, OAS, workplace pension, part-time work, rental income, etc.?
Stress Test Your Portfolio: As mentioned earlier, simulate different market scenarios to see how your portfolio would perform. Ensure you’re prepared for worst-case scenarios.
Consider Professional Help: If you feel overwhelmed, consider consulting a financial planner to get guidance on your retirement strategy. You don’t have to do it alone, even if you’ve been managing your investments yourself up until now. Some, especially advice-only financial planners, may offer consultations with an hourly fee, while others will provide one-time or ongoing comprehensive financial planning engagements.
VIII. Taking Control of Your Financial Future
It’s normal to feel anxious about investing, particularly when approaching retirement, but by taking a strategic, long-term approach to your investments, you can maintain peace of mind.
Review your portfolio, reassess your risk tolerance, and ensure your investment strategy aligns with your goals. If needed, seek guidance to stress-test your plan.
Finally, don’t let anxiety dictate your financial decisions. Trust in the long-term approach, stay informed, and adjust when necessary to secure your financial future.
This is the 284th blog post for Russ Writes, first published on 2025-04-07.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.