Market storms, recession fears putting retirement portfolios in focus

High-net-worth advisor portfolio manager highlights risks to clients' nest eggs, and how she's taking action to protect their retirement plans

Market storms, recession fears putting retirement portfolios in focus

Amid the swirling risks of market volatility and recession, worried investors across Canada are turning to their advisors for much-needed reassurance. And according to one high-net-worth advisor, those concerns are particularly acute among a key client segment.

“Most of our clients are high-net-worth individuals who are either retired or approaching retirement in the next 10 years,” says Tanya Wilson, senior wealth advisor and portfolio manager at Gold Seal Financial Group with Wellington-Altus Private Wealth. “Retirement timing as it relates to a recession is quite important for us right now in our conversations.”

After portfolio ‘gut punches,’ panicked investors at risk

For her retired clients, Wilson says the most dominant concerns revolve around their financial ability to maintain their retirement lifestyle – including travel and other leisure activities – assuming a sustained recession happens. Among near-retirees, the prospect of recession is also worrying given the impact it could have on their planned retirement timeline.

“There’s plenty of evidence around sequence of returns risk, where an investor’s return experience in the five years before and after their retirement date can have a dramatic impact on the sustainability of their nest egg,” Wilson notes. “If you’re entering retirement just around the time recession hits, and there’s a drop in portfolio values, it can have quite a devastating effect on the longevity of those retirement assets. It may cause certain retirees to run out of money in their lifetime.”

Like many advisors, Wilson has found clients tend to overestimate their risk tolerance when everything is going well. But when markets get stressed, they would typically reverse course as the “gut-punch feeling when opening their monthly statements” causes them to re-evaluate their ability to tolerate risk.

“Some investors are getting spooked by that dirty R word, that recession. Their knee-jerk reaction is to sell high-quality assets in their investment portfolios when the markets are down,” she says. “These people tend to move to GICs because they like the feeling of safety and security they provide.”

Wilson acknowledges interest rates on short-term securities and cash holdings today are attractive compared to where they’ve been historically. But once markets get to the other side of the valley of recession, interest rates are likely to go down, making that yield benefit much less compelling.

“Recessions are natural, normal, healthy parts of the economic cycle,” Wilson says. “But it's creating emotions in people where they may make poor investment decisions. And these are decisions that can ultimately negatively affect their retirement cash flow plans.”

She also worries about what investors who rushed into GICs will do when the stormy stock market inevitably calms. “They’ll either have been so spooked by what’s happened that they won’t go back to growth assets, potentially hurting their retirement portfolios’ ability to keep up with inflation moving forward, or they’ll venture back into the market when stock prices are possibly much higher.”

Inflation ‘thief’ still threatening retirement plans

Over the past few months, both the US and Canada have seen CPI rates moderate from the sizzling multi-decade inflation highs in the summer of 2022. But with headline inflation still above the minimum 2% level that central banks have typically used for their price stability targets, Wilson continues to count it among the biggest risks to retirees’ ability to achieve their long-term goals.

“It's not short-term stock market movements so much as inflation – I like to call it the ‘cash thief’ – that’s going to be a major influence on that,” she says. “A dollar 10 years from now will not buy the same basket of goods that a dollar today can buy. If you don't properly plan for that, a retired person could be in for a great shock down the road.”

Over the past two years, Wilson says she and her team have been updating clients regularly; in contrast to the markets, she says client portfolios have not gone down significantly thanks to their strategy of well-managed portfolio diversification. But with the average Canadian in their 60s expected to live on for decades, Wilson says many such clients are likely to experience several more bouts of recession, and the ability to manage emotions amid turmoil will remain crucial to long-term success.

“Money is very emotional. It's one of the most emotional things to have, which is why I always go back to the importance of a written financial plan,” she says.

“We’re updating plans to show clients they’re actually still ok, that we’ve been putting checks and balances in place, building up cash reserves from dividends and interest during good times … Right now, we’re managing the emotions of our clients, which I think is the most important thing an advisor can do in this type of environment.”