For most of our working lives, retirement was a far-off dream that always seemed decades away.

Saving and investing for that elusive future was more of an abstract idea than an urgent necessity. But once retirement comes into clear view on the horizon, it triggers a whole new set of powerful emotions and mental hurdles.

The stakes get very real as the assets we’ve worked so hard to build up must now sustain us for the rest of our lives. There are no more "do-overs" or making up for mistakes with future earnings. The pressure ramps up to get it right and avoid financial blunders just years before or after exiting the workforce.

For most people, retirement investing carries higher stakes than investing for the long term when younger. After decades of diligent saving and investing, the nest egg you've built needs to provide for your lifestyle for the rest of your life. There's less time and capacity to recover from big losses or missed opportunities.

It's only natural that as retirement age approaches, many investors become gripped by fears - some rational, others irrational byproducts of insidious behavioral biases.

These insecurities breed a host of deep-seated psychological fears around investing and finances that can badly undermine even the best-laid retirement plans. From running out of money too soon to missing the next big growth opportunity to just feeling overwhelmed by complexity, retiree investors face a gauntlet of mental obstacles that everybody needs to confront.

In this note, we explore the greatest fears holding back retiree investors, the behavioral biases and hard-wiring causing them, and specific strategies to neutralize these fears and make better decisions.

Fear #1: Running Out of Money

This primal fear stems from the very legitimate risk of longevity - living longer than expected and burning through your savings too fast.

It's compounded by dangers like inflation eroding purchasing power, healthcare costs spiraling, and more. The dread of downgrading your lifestyle or becoming destitute in old age can lead to paralysis or overly conservative investing.

Behavioral Culprit: Loss Aversion

Humans are wired to feel the pain of losses more acutely than the pleasure of gains. This asymmetric loss aversion can make retirees overly focused on avoiding any losses versus rationally growing their portfolios to deal with the risk of living a long life without financial security.

Holding a portion of your retirement savings in equities is key to funding two or three decades in retirement. Being overly conservative and putting all your assets in bonds and cash may feel right at the moment but lead to a depletion of your standard of living over the long term.

Solution:

Embrace a diversified portfolio with enough growth potential but managed risk.

Establish a “safe” bucket of assets to fund your lifestyle expenses over the short term (usually 3 years) and invest the rest of your portfolio in a mix of equities, bonds, and alternatives designed to outperform inflation.

Consider annuities for your portfolio. You’ll be trading potential future portfolio appreciation for the safety of a known income stream. Not everybody wants or needs to maximize their financial wealth. Many people simply desire more certainty in their lifestyle.

Fear #2: Missing the Upside

Whether it's not buying tech stocks 20 years ago, or getting in too late on this decade's big AI/machine learning wave, investors naturally fear being left behind by transformative trends and missing out on massive growth.

FOMO (fear of missing out) is acute for retirees with less time to make up for opportunity costs.

Behavioral Bias: Hindsight & Recency Bias

We all fall victim to hindsight bias that makes past events seem more predictable than they were. Our quick-moving economy and innovation can cloud rational judgment on what's truly here to stay versus a short-term fad.

Even professional portfolio managers rarely get revolutionary shifts timed perfectly. It always takes a while to recognize the “new, new” thing”. Many of us bought Nvidia for reasons unrelated to AI but that’s the part of the story that the market is currently focused on.

Patient, disciplined investing through trends and fads tends to win out for most investors. Unlike prior innovation cycles, this time around the innovation in AI is concentrated amongst large-cap stocks such as Nvidia, Microsoft, and Meta already belonging to well-tracked indices such as the S&P 500.

Solution:

Gain exposure to major disruptive themes like tech, biotech, cleantech, fintech, etc via broad funds rather than picking individual winners.

Fear #3: Feeling Like a Failure

Pride makes us fear being seen as foolish, especially by loved ones like spouses and peers we admire.

Maybe our portfolio is down while others are bragging about a hot stock. Or an investment went bad that your wife warned you against. Ego and hubris make us afraid to look incompetent.

Behavioral Bias: Overconfidence, Ego

Yes, you've been a successful professional and a good saver. You have amassed more assets than you could have imagined when you were starting fresh out of college.

But investing expertise doesn't necessarily tag along with professional achievement. Like any other field, investing takes years to master and frankly, you are never done learning. Unchecked overconfidence and refusal to admit errors are the downfall of many investors unwilling to accept that investing is not for the faint of heart.

Even the best investors like Warren Buffett, Peter Lynch and others have made mistakes and openly credit luck as a significant factor. Expecting perfection is hubris.

Solution:

Adopt a humble, learning mindset - be open to feedback and learn from your mistakes.

Have clear investing criteria and a process to eliminate emotional, ego-driven decisions. Investing is for those looking for personal redemption or entertainment value.

If an expertise gap exists, hire a professional to help you out. In the meantime, keep things simple. Remember when the markets take a dive, everybody feels the pain - you’re not the only one feeling like a failure. By definition not everybody can be a failure at the same time, so lick your chops and focus on what is under your control. Negative feelings will just harm you.

Fear #4: Overwhelmed by Complexity

The dizzying array of investment options, tools, and hacks can leave retirees paralyzed like a deer in headlights. Analysis paralysis often sets in and some people simply bury their heads hoping it'll all pass and be okay.

Behavioral Bias: Choice Overload, Information Overload

Ironically, too much choice and information can leave you feeling stressed and anxious rather than empower you to take action. Barry Schwartz wrote about this in his book, “The Paradox of Choice”.

Too much information and choice do not always improve our decision-making if we let complexity get in the way of finding a solution right for ourselves. It may not be the optimal solution, but second best is often good enough.

Solution:

Don’t try to always come up with the perfect solution and waste endless time researching and never making a decision. Make your decision, and if later you find a better solution simply make the change without looking back.

Narrow down your sources of advice to a few trusted ones. Pick a broad market index fund rather than a thematic ETF. Look for the basics first - getting exposure to your desired asset class at a reasonable fee.

Remember it’s far better to act now than to wait for the perfect opportunity. Like having children, you can not plan your whole financial journey and not expect detours and challenges. Do your research but don’t wait forever to execute because you are seeking perfection.

Fear #5: Selling Too Soon

This is the haunting fear of selling a potential multi-bagger like Apple, Amazon, or Netflix way too early and missing out on a fortune.

I know way too many people who bet the ranch in the 90s on a few glamour stocks and lost their shirts over the 2000-2003 period when the market reverted back to valuing real profitability.

Sometimes it’s better to sell a portion or all of your winnings to deploy the capital elsewhere. By gradually selling based on pre-determined price limits you avoid ending up with nothing.

Behavioral Bias: Regret Aversion

The fear of selling investments too soon, only to watch their value soar afterward, is a significant concern for many investors.

This fear is linked to the behavioral bias known as regret aversion, which involves the tendency to avoid actions that might lead to regret. In investing, this can result in holding onto investments for too long, potentially missing out on optimal selling opportunities.

Solution:

Have a dispassionate, pre-planned process for selling positions. A well-known tendency of markets is to become overly exuberant and temporarily ignore fundamentals. During those times, you are better off potentially leaving some upside on the table for the certainty of money in your pocket.

Focus on relative performance vs benchmarks more than absolute price points.

Let your winners run but rebalancing systematically when your positions become significantly overweight.

Asset Allocation Performance Review

High-Level Observations:

• All asset allocation portfolios we monitor are up year-to-date with higher-risk portfolios exhibiting commensurate higher returns.

• The plain vanilla 60/40 strategy holding only the S&P 500 and the Aggregate Bond Index has done remarkably well. It’s up 5.7% over the last 3 years and 9.2% annualized over the last 5 years.

• The global version of a 60/40 portfolio has not performed anywhere as well as the purely domestic version. The global 60/40 is only up 1.4% annualized in the last 3 years and 5.8% over the last five years.

• The main reason for the outperformance of the 60/40 is due to the performance of the S&P 500 which has been heads and shoulders above that of any of the other major asset classes.

• Conservative portfolios with a heavier allocation to bonds are still recovering from the jump in interest rates starting in 2022 and have performed significantly below historical norms.

• Over the last three years, the GF Low-Risk strategy is only up 1.4% on an annualized basis (before fees and transaction costs). Going back 5 years the annualized performance improves to 4.7%.

• Equity-heavy allocations have outperformed more conservative allocations thanks largely to the performance of US large-cap equities.

• The GF High-Risk strategy is up 3.5% on an annualized pre-cost basis over the last three years. Over the last 5 years, the strategy is up a respectable 8%.

• Year to date, commodities have provided a nice boost. A big reason is higher oil prices. Most recently, precious metal prices have joined the party providing a further boost.

• International fixed income remains a disappointing asset class for IUS investors. Yields are lower than in the US and the unexpected strength of the US dollar has resulted in negative performance.

• Fixed-income strategies focused on short maturities and credit have outperformed Treasuries.

Weekly Performance Attribution

Long-Term Asset Allocation Portfolio Characteristics

Expected Returns: Expect slightly lower than normal equity and bond market returns given valuation conditions

Risk: Diversify with alternative assets, market volatility has been significantly below historical measures

Equity Risk: Asset allocation portfolios are dominated by equity market risk, no different from the past.

A Bit of Wisdom Never Hurts

Disclaimer: This newsletter is not trading or investment advice but for general informational purposes only. This newsletter represents my personal opinions which I am sharing publicly as my blog. Futures, stocks, and bonds trading of any kind involve a lot of risk. No guarantee of any profit whatsoever is made. You may lose everything you have. We guarantee no profit whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this newsletter, its representatives, its principals, its moderators, and its members, are NOT registered as securities broker-dealers or investment advisors either with the U.S. Securities and Exchange Commission, CFTC, or with any other securities/regulatory authority. Consult with a registered investment advisor, broker-dealer, and/or financial advisor. By reading and using this newsletter or any of my publications, you are agreeing to these terms. Any screenshots used here are the courtesy of Global Focus Capital and Retirement With Possibilities. The data, quotes, and information used in this blog are from publicly available sources and could be outdated or outright wrong - I do not guarantee the accuracy of this information.