The Retirement Red Zone

IN THE RETIREMENT RED ZONE, the period five years before and five years immediately following retirement, even a short-term market downturn can have a significant impact on your future retirement income stream. Accordingly, to extend the football metaphor, just as they do when a team approaches the goal line and threatens to score, emotions tend to run high.

In fact, a new study entitled “Behavioral Risk in The Retirement Red Zone” identifies five dominant emotions – fear, regret, inertia, susceptibility, and aggressiveness – that can cause you to react to market uncertainty in ways that could harm your portfolio. Specifically, 80% of survey respondents registered high or moderate degrees of regret and 71% reported high or moderate degrees of fear, emotions that could cause you either to hesitate to take action or be less likely to take on necessary, managed risks.

Significantly, although the report sponsored by Prudential Financial, Inc. found that three of four investors are affected by their emotions to a moderate or high degree, only 35% believe emotions impact their investment decisions. Clearly, although behavioral finance, the study of how emotions affect financial decision-making, has gained ground since Daniel Kahneman was awarded the Nobel Prize in 2002 for his work in the field, there’s still work to be done.

According to the study results, for most investors, the first step may be the most difficult. Because you are less likely to be swayed by emotions if you recognize that emotions can influence your decisions, simply understanding more about your decision-making can mitigate the effects of behavioral risk on your portfolio. So, open up to your spouse, friend, or family member, and, remember, we’re always ready to listen or answer questions.