Geopolitical risks and their impact on retirement portfolios are a cause for concern, but there's a crucial aspect that often goes unnoticed. The true challenge lies in managing the psychological impact of market volatility, especially during retirement.
Imagine watching your hard-earned savings swing in response to global tensions. It's a nerve-wracking experience, and for those nearing or already in retirement, it can be especially daunting. According to a Fidelity survey, over half of financial advisers cite geopolitical risk as their clients' primary concern. But here's the twist: financial planners argue that these moments are precisely why retirement plans are designed to be resilient.
The recent military strikes by the U.S. and Israel on Iran, including the killing of Ayatollah Ali Khamenei, have led to retaliatory attacks across the Gulf region. North American markets reacted with a decline on Tuesday, joining a global market downturn. In the Fidelity survey, 59% of advisers predicted that geopolitics would be the most influential macroeconomic factor this year, followed by market volatility and inflation.
But here's where it gets controversial: financial planners emphasize that downturns are an inherent part of investing. "You should assume they're going to happen," says Adam Chapman, a certified financial planner from London, Ontario. This assumption, they argue, should be a fundamental aspect of any retirement plan.
The urge to panic is often strongest for new retirees. "Sitting on your hands gets harder when you retire, even with a solid plan," Mr. Chapman adds. Retirees, who have spent decades accumulating savings, now find themselves drawing from their nest egg instead of adding to it. Witnessing investments fall while withdrawals continue can be unsettling, leading to what planners call "sequence of returns risk."
If markets decline during the initial years of retirement while withdrawals are ongoing, losses can be more severe than if the same downturn occurred later. Colin White, a certified financial planner and CEO of Verecan Capital Management in Halifax, acknowledges that no one can predict every geopolitical outcome. However, he views periods like these as a test, evaluating both the retirement strategy and the adviser's expertise.
"If you feel the need to change your portfolio because of a war, your portfolio is already flawed," Mr. White asserts. "It should be designed to withstand such events, not be dependent on predicting their timing."
Some advisers use Monte Carlo simulations to model retirement plan performance across various market scenarios. However, Mr. Chapman cautions that while these simulations can be beneficial, they may also induce unnecessary anxiety and might not accurately reflect real-world conditions.
"If we're seeking a stress test for reassurance, it's likely because something else is amiss," he explains. "Even if the results are positive, if they're not 100% perfect, you might still feel anxious."
Instead, Mr. Chapman recommends that clients ask their advisers to review their entire financial plan, including short- and long-term goals, to ensure they're on the right track. Chris Raper, a portfolio manager at Aspira Wealth of Raymond James Ltd. in Victoria, suggests using times of geopolitical tension to assess the geographic diversity of one's portfolio.
Many Canadians, Mr. Raper notes, are more exposed to U.S. markets than they realize, partly due to the success of U.S. stocks in recent years. In 2010, U.S. stocks made up 48% of the MSCI World stock market index; now, that share has grown to around 72%.
Panic often arises, Mr. Raper explains, when retirees don't have enough cash set aside to cover expenses. A well-designed retirement plan should include one to three years' worth of spending in a high-interest savings account, ensuring they don't have to sell investments during a downturn.
"You never want to be in a position where you're forced to sell stocks in a down market to meet your cash flow needs," Mr. Raper advises. "Equity markets tend to recover within three years, even the most severe downturns."
So, while geopolitical risks are a valid concern, the key lies in having a robust retirement plan that accounts for market volatility. It's a delicate balance, and one that requires careful consideration and expert guidance.
