Watching your portfolio swing in response to geopolitical turmoil is never easy, especially if you are in or near retirement.
More than half of advisers say geopolitical risk is their clients’ top concern, according to a recent Fidelity survey. But financial planners say moments such as this are exactly what retirement plans are meant to withstand.
Following U.S. and Israeli military strikes on Iran on Saturday, including the killing of Iran’s supreme leader, Ayatollah Ali Khamenei, Tehran launched retaliatory missile and drone attacks across the Gulf region, home to several U.S. military bases. North American markets fell on Tuesday amid sector-wide losses, joining a larger global market decline.
In the Fidelity survey, 59 per cent of advisers said geopolitics is the macroeconomic factor they expect will most affect portfolios this year, followed by market volatility and inflation. Between 2,500 and 3,100 advisers were polled on Jan. 28 during Fidelity’s Toronto Vision hybrid event.
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Still, planners say that downturns are part of investing. “You should assume they’re going to happen,” said Adam Chapman, a certified financial planner and founder of YESMoney in London, Ont.
That assumption should already be built into a retirement plan, Mr. Chapman said. Otherwise, market declines can trigger panic and reactionary decisions that damage long-term outcomes.
The urge to panic is often greatest for new retirees. “Sitting on your hands gets a lot harder when you retire, even when you have a good plan in place,” Mr. Chapman said.
After decades of accumulating savings, retirees begin drawing from their nest egg instead of adding to it. Watching investments fall while withdrawals continue can feel destabilizing and introduce what planners call “sequence of returns risk.”
If markets decline in the first few years of retirement while withdrawals are underway, losses can compound more severely than if the same downturn occurred later.
Colin White, a certified financial planner and chief executive of Verecan Capital Managementin Halifax, said no one can plan for every geopolitical outcome. But periods like this offer a useful test, of both a retirement strategy and the adviser behind it.
If you feel you need to change your portfolio because of a war, “you’ve got a bad portfolio,” Mr. White said. “Your portfolio needs to be built assuming these things are going to happen, not anticipating when they’re going to happen.”
Some advisers use Monte Carlo simulations, a test that models how a retirement plan might perform across thousands of market scenarios.
But Mr. Chapman cautions that while these exercises can be helpful, they can also create unnecessary anxiety and may not perfectly reflect real-world conditions.
“If we’re looking for a stress test to help us feel better, it’s probably because something else is missing,” he said. “We can go in, and stress test it all you want, but if it comes back as anything under 100 per cent, you’re probably going to feel like garbage.”
Instead, Mr. Chapman recommends that clients ask their advisers to walk through their full financial plan, including short- and long-term goals, to ensure they remain on track.
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Victoria-based Chris Raper, a portfolio manager at Aspira Wealth of Raymond James Ltd., said times of geopolitical tension are good to assess the geographic diversity of your portfolio.
For example, many Canadians are more exposed to U.S. markets than they realize, Mr. Raper said. That is in part owing to the success that U.S. stocks have had in recent years.
In 2010, U.S. stocks made up 48 per cent of the MSCI World stock market index. Now, that share has grown to around 72 per cent.
Mr. Raper said panic often arises when retirees do not have enough cash set aside to cover expenses. In a sound retirement plan, clients should keep one to three years’ worth of spending in a high-interest savings account, so they are not forced to sell investments during a downturn.
“You never want to be in a position where I’ve got to sell stocks in a down market to fund your cash-flow needs,” Mr. Raper said. “Equity markets tend to recover within three years, even the most severe ones.”
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