For 3 Years, Markets Have Soared Ever Closer to the Sun: Is It Time to Protect Your Gains Before Their Wings Melt?
Hooray for the market's double-digit growth three years in a row, but it could be time to check in on your risk tolerance.
Investors can't help but be pleased with the market's performance over the past three years.
There have been intermittent signs of volatility when world events made the market temporarily shaky, but overall, there's been a positive upward trend for quite some time. The S&P showed double-digit gains for 2023, 2024 and 2025.
Retirees and those nearing retirement may have been especially jubilant as they watched their portfolios grow. But they also may be experiencing another feeling. To accomplish what they have with their retirement savings, they may have taken on risk, which may or may not have made them anxious.
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Now the questions arise:
How do they feel about risk right now?
Have the recent good times lulled them into thinking that they aren't facing as much risk as they actually are?
The dangers of recency bias
Investors can sometimes fall prey to something called recency bias. This is the tendency to place too much emphasis on what's happened lately rather than also looking at long-term trends.
Recency bias can work both ways. If times have been tough, people can become gloomy and worry that they will never get better.
If the market has performed well — as it has for three years in a row — they expect that to continue, even though history tells us that, almost certainly, the market will head in the opposite direction at some point.
History shows that three years of double-digit gains are uncommon, with a negative year almost always tossed in there somewhere.
If you look at long-term return data for the S&P 500 — such as datasets compiled by institutions such as the NYU Stern School of Business — you'll find there have been only a handful of periods since 1926 in which the market produced three consecutive years of double-digit gains.
In most of those cases, the fourth year has been positive as well, though not always.
While that leaves room for optimism, it's no guarantee that this particular three-year double-digit span will be followed by a fourth good year or even a fifth one.
Still, recency bias can be hypnotic, and retirees and near-retirees especially need to be careful not to be caught up in its spell.
Risk tolerance vs risk capacity
It's easy to fall prey to the enchantment. As success builds on success with your portfolio, your confidence grows along with the numbers. The idea of a market drop can seem distant — and even more so after a few of these positive years are strung together.
But while your willingness to take more risk may have increased, your ability to might not have kept up.
This is where it's wise to look at your risk tolerance vs your risk capacity.
Risk tolerance is how willing you are to endure market volatility without losing sleep over each fluctuation.
Risk capacity is whether you and your portfolio can withstand those fluctuations.
When you're nearing retirement age, your risk tolerance may or may not remain the same. But your risk capacity changes. In your younger years, you could afford to be unmoved by market dips because you had plenty of years — even decades —to recover.
Now, your focus is no longer on growing your money; it's about protecting it. You'll be counting on that money to live on in retirement, and a market decline can be devastating to your portfolio, especially if you're withdrawing money at the same time you're sustaining market losses.
It becomes difficult — if not impossible — to recover, and soon your portfolio could wither away completely.
At this stage of life, the timing of a loss becomes as important — maybe even more— than the amount of the loss due to This is sequence of returns risk. Essentially, a market decline early in your retirement can have a disproportionate effect on the long-term outlook for your portfolio.
The five years right before retirement and the first five years of retirement are sometimes referred to as the "fragile decade" because of how vulnerable your portfolio can be during this time.
That is why around five years out from retirement is a good time to start reassessing your risk and deciding whether you should reduce it.
Re-evaluating risk
When evaluating risk at this stage, I often ask clients a clarifying question: If your portfolio grew by another $100,000, would it change your lifestyle?
For many families, the answer is no.
Then I ask a follow-up: If the market declined and that same $100,000 disappeared, would it affect your decisions? Your confidence? Your peace of mind?
In most cases, the answer is yes.
For many, losses are much more devastating than gains are gratifying.
Does this mean, as retirement approaches, you should eliminate all risk, withdrawing from the market entirely and putting your money in CDs, bonds or anything else that seems a safer bet?
Not at all. Even in retirement, it's important to have a portion of your portfolio invested for growth. Otherwise, another risk — inflation — can whittle away at your buying power.
But you do want to re-evaluate and possibly trim back the risk. If you've spent decades saving, investing and taking on risk — and your portfolio has benefited from that discipline — there may come a point at which the question shifts from "How much more can I gain?" to "How much am I willing to risk losing?"
For many investors nearing retirement, the answer to that question is more important than any market forecast.
If you've already played the game, taken the risks and won, it may be worth asking whether continuing to play the same way still serves your future.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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