In times of geopolitical turmoil and market downturns, the instinct to withdraw investments and seek safer havens can be overwhelming. However, financial professionals caution that such moves often prove detrimental, particularly for individuals approaching retirement age.
The Perils of Panic Selling
Consider the scenario of a 57-year-old investor with a Tax-Free Savings Account (TFSA) intended for retirement and as a cushion for a mortgaged condo. With global markets reacting to conflicts in the Middle East—exemplified by the Dow Jones dropping over 700 points on March 9, 2026—the temptation to pull funds until stability returns is understandable. Yet, altering one's risk profile mid-downturn can crystallize losses and complicate financial recovery.
Historical Context of Market Reactions
Research indicates that geopolitical shocks, such as those in the Middle East, significantly increase market volatility, especially for countries closely linked to the crises. A seminal 2006 study established a causal relationship between such events and financial market fluctuations, with the most severe impacts typically localized to directly involved nations.
Surprisingly, wars have not historically caused the worst market declines. Global stocks fell approximately 31% during World War I and 15% during World War II. In contrast, the 1929 crash erased over half of market value, the 1973 oil shock wiped out 47%, the dot-com bubble burst cost 44%, and the 2008 recession saw a 41% drop.
The Equity Risk Premium and Time Horizon
Ben Felix, a portfolio manager and co-host of the Rational Reminder Podcast, emphasizes that war-related volatility is not the primary driver of severe market downturns. He notes, "If you're panicking about market volatility because of a war, maybe you shouldn't have been in stocks in the first place."
The equity risk premium—the extra return from stocks over risk-free assets like government bonds—rewards investors for enduring uncertainty over the long term. For a 57-year-old planning to retire at 65, this premium may still be accessible, but for those aiming to retire sooner, the benefit diminishes due to shorter timeframes.
Risk Tolerance Versus Risk Capacity
A critical distinction in investment strategy lies between risk tolerance and risk capacity. Risk tolerance reflects emotional comfort with market swings, while risk capacity is the financial ability to withstand volatility based on one's timeline. An aggressive investor needing capital within two years possesses low risk capacity, regardless of their boldness on paper.
Stress over investments often signals an inappropriate initial risk profile. Instead of making hasty changes during downturns, experts advise maintaining current allocations until markets stabilize, then reassessing with a financial adviser.
Strategies for Mitigation
Diversification remains a key tool for reducing the impact of geopolitical events. For instance, the U.S. stock market may be particularly vulnerable during certain crises, prompting investors to consider global rebalancing. Additionally, a holistic financial plan that incorporates personal values and scenarios—beyond mere asset projections—can provide clarity and confidence, reducing panic-driven decisions.
Ultimately, while wars are human tragedies with economic repercussions, investors have control only over their financial responses. Building a resilient nest egg requires understanding market dynamics, aligning investments with timelines, and seeking professional guidance rather than reacting impulsively to volatility.
