Investors are becoming more cautious, but adjusting risk levels doesn’t necessarily mean abandoning long-term investment goals.

Despite the stock market’s recent gains amid COVID-19, there’s still potential for volatility in 2021. With vaccines available, uncertainty about how a worsening pandemic could affect the economy is prompting many investors to adopt a more conservative approach. This is particularly true for those nearing retirement, who vividly recall the significant losses during the Great Recession.

“Even though markets have rebounded, volatility persists,” states Cyrus Bamji, communications director at a nonprofit focused on educating investors about the importance of secured lifetime income. “This has led to a notable shift in risk tolerance and a move towards safer investments.”

A recent study revealed that 25% of Americans approaching retirement have decreased their risk tolerance because of the pandemic. Another survey indicated that the share of households with a pension or annuity reached 40% in 2020, up from 37% the previous year — a rise of 3.1 million households.

Many of the investors adopting a more conservative stance are those who plan to retire in the next five to ten years. They can’t afford significant losses that could impact their retirement savings. “Individuals close to their financial milestones, whether it’s retirement or funding a child’s education, are the ones increasingly inquiring about minimizing risk and integrating more protection into their financial strategies,” notes Leanna Devinney, a branch leader at a major investment firm. “Those with longer timelines tend to be more comfortable maintaining their investment discipline.”

TIME TO REASSESS RISK

The pandemic, while painful, also provides a chance for investors to evaluate their current positions and future aspirations. Stock prices have surged for more than a decade, aside from a severe dip in March. The market’s resilience has instilled confidence, leading some to stretch their risk tolerance beyond what they may have been comfortable with. Now is a good time to reassess.

“This is an excellent moment to discuss your risk appetite,” advises Jody D’Agostini, a financial advisor with a leading advisory firm. “Investors have been venturing into riskier territory, fearing they might miss out on potential gains, even if they may not have the risk tolerance to back it up.”

Since COVID-19 struck, many long-term plans and aspirations have transformed. Some who envisioned a retirement of travel are now opting for a more modest lifestyle. Others are concerned about their health, job stability, and the adequacy of their retirement funds. “Traumatic events prompt important self-reflection. Assess what has shifted in your life circumstances. Evaluate your current situation and your investment path,” suggests D’Agostini.

ADJUSTING RISK WITHOUT DISRUPTING YOUR PLAN

If your portfolio has become overly risky or if stock market fluctuations keep you up at night, there are strategies to mitigate risk while keeping your investment plan intact. The last thing you want is to become too conservative, jeopardizing your long-term objectives.

Striking a balance between reducing risk and acknowledging potential opportunity costs starts with understanding your investment timeline. “If you have over ten years until retirement, that discussion differs greatly from needing your funds in 12 months,” explains Amy Richardson, a financial planner. In that case, becoming more conservative, such as increasing cash allocations, is advisable. For those with three to seven years until retirement, Richardson suggests reducing equity exposure and enhancing fixed income investments. The closer you approach your retirement date, the more conservative your strategy should be. This is preferable to a panic-driven switch to all cash. “Time in the market is far more advantageous than timing the market,” Richardson emphasizes.

ANNUITIES PROVIDE SECURITY

In uncertain times, risk-averse investors often turn to the safety of annuities, a trend reminiscent of the Great Recession.

Annuities are insurance contracts providing regular payments either now or in the future. They can be lifetime annuities or those for a set period. Some are purchased today but not accessed for years, serving as a supplemental income source (often referred to as longevity insurance). Annuities offer investors protection for retirement savings along with guaranteed income.

The current low performance of bonds, which have typically been viewed as a safe haven, has increased the appeal of annuities. With interest rates at historic lows, annuities shield investors from principal loss and provide returns often exceeding those of bonds, according to Bamji.

The primary advantage of annuities is peace of mind. A study indicates that when individuals know they won’t “lose it all” in the stock market because part of their portfolio is secured, they’re less likely to panic during market downturns. “When people are assured of a guaranteed income source covering their essentials, their risk tolerance for other investments rises regardless of market fluctuations,” says Bamji. “During volatility, those with annuities are less likely to react negatively to their portfolios, viewing market dips as buying opportunities instead.”