Market Risk

Posted October 21, 2025, By Cole Ferrier

Key Takeaways:

• Market Risk is the unavoidable danger that your investment portfolio, particularly the stock portion, will decline in value due to broad economic or geopolitical events.

• While unsettling, accepting market risk is the price of admission for earning the long-term returns needed to outpace inflation and fund a multi-decade retirement.

• The most dangerous interaction is with Sequence of Returns Risk, where a market downturn in the first few years of retirement can cause permanent damage to your plan's longevity.

• The most powerful tools for managing market risk are not about avoiding it, but about controlling your reaction to it through proper asset allocation, disciplined rebalancing, and having a cash reserve.

We've now debugged the internal risks of your own aging and the external threats from predators. We turn our attention back to the financial engine of your plan—your investment portfolio—and confront its most inherent and unavoidable feature: Market Risk.

Market risk is the volatility you see on the nightly news—the dizzying drops and exhilarating climbs of the stock market. It’s the risk that the value of your hard-earned assets will fall, not because you picked a bad company, but because the entire economic tide is going out. For retirees who are no longer adding to their portfolio but are instead drawing from it, watching their account balance shrink can be one of the most psychologically taxing experiences they face.

My engineering background has taught me that any powerful system has inherent operational volatility. A jet engine has vibrations; a high-performance car has a stiff suspension. You don't eliminate these characteristics; you design a system to manage them. Market risk is the vibration in your portfolio's growth engine. Trying to eliminate it entirely means shutting off the engine and guaranteeing you'll never reach your destination. The goal of a resilient retirement blueprint is to build a vessel sturdy enough to ride out the inevitable storms, not to hope for perpetually calm seas.

By the Numbers

• -30%: The average peak-to-trough decline for the S&P 500 during a bear market since 1929. These events are not rare; they are a normal, recurring feature of investing. (Source: "Bull & Bear Market & Correction History," First Trust, 2023)

• 15: The number of bear markets (defined as a drop of 20% or more) the U.S. stock market has experienced in the last 95 years, averaging about one every 6.3 years. (Source: Hartford Funds, "The Bull & Bear Markets of the Past Century," 2023)

• -1.4%: The worst-case return of holding a 100% equities portfolio held at global market cap weighting, demonstrating that despite short-term volatility, the long-term odds have historically been in the favor of the patient investor. (Source: Vanguard, "120 years of returns: a journey through time in global portfolios", 2020)

From the Case Files

Consider two friends, Tom and Jerry, who both retired in early 2008 with identical $1.5 million portfolios. The financial crisis hit, and by early 2009, their portfolios were down nearly 40%, to around $900,000.

• Tom panicked. Seeing his life savings evaporate, he sold all of his stocks and moved to cash, vowing to get back in "when things settled down." He locked in his losses. By the time he felt comfortable reinvesting years later, the market had roared back, and he had missed the majority of the recovery.

• Jerry was terrified, but he stuck to his plan. His well-designed portfolio had a mix of stocks and high-quality bonds. He drew his income from the bond portion, rebalanced by buying more stocks at low prices, and never sold a single share of his equity holdings in a panic. By 2013, his portfolio had fully recovered and was once again growing. Tom's never caught up.

Understanding the Risk: The Price of Admission

Market risk, also known as systemic risk, is the risk of financial loss resulting from movements in the overall market. It's caused by broad factors that affect all companies, such as recessions, changes in interest rates, geopolitical conflicts, or pandemics. Because it affects the entire system, it cannot be eliminated through diversification across different stocks or industries.

This is a critical concept: you are paid for taking on this risk. The reason stocks have historically delivered higher returns than "safe" assets like cash or government bonds is precisely because they are not safe in the short term. The higher potential return, often called the "equity risk premium," is your compensation for enduring the volatility. Accepting market risk is the price of admission for long-term growth.

The Impact on Your Plan: The Sequence of Returns Amplifier

Market risk is the primary driver of the most dangerous threat to a new retiree's portfolio.

• Interaction with Sequence of Returns Risk: This is the most critical interaction in all of retirement planning. A market downturn after you've been retired for 15 years is manageable; your portfolio has likely grown enough to withstand it. A market downturn in the first five years of retirement is a potential plan-killer. When combined with withdrawals, it can trigger a death spiral for your portfolio from which it may never recover.

• Interaction with Excess Withdrawal Risk: Market risk turns an aggressive withdrawal rate from a potential problem into a definite catastrophe. A 5% withdrawal rate might seem fine in a bull market, but in a bear market where your portfolio drops 30%, that 5% withdrawal suddenly becomes a 7.1% withdrawal relative to your new, lower balance, drastically accelerating the depletion of your capital.

• Interaction with Longevity Risk: A long retirement guarantees you will experience multiple bear markets. Your plan can't just be built to survive one storm; it has to be seaworthy enough to navigate a lifetime of changing weather.

Solutions & Your Risk Mitigation Toolkit

A sound strategy for market risk isn't about market timing or trying to predict the next crash. It’s about building a disciplined, all-weather approach that controls your behavior when markets are chaotic.

• Tool #1: Asset Allocation. This is your single most powerful tool. By owning a diversified mix of assets that don't always move in the same direction—primarily stocks and high-quality government bonds—you can smooth out your portfolio's returns. When stocks are down, your bonds provide stability and a source of funds for withdrawals. Finding the right allocation for your risk tolerance is the foundational step in managing market risk.

• Tool #2: Disciplined Rebalancing. This is the simple but powerful practice of periodically selling assets that have performed well and buying those that have performed poorly to return to your target asset allocation. It forces you to systematically "sell high and buy low," instilling a discipline that is the exact opposite of the panic-selling that derails most investors.

• Tool #3: A "Bucket" Strategy or Cash Reserve. As we've discussed, this is a practical way to insulate your spending from market volatility. By holding af few years of living expenses in a "safe" bucket of cash and short-term bonds, you create a buffer. This can reduce the risk that you have to sell your stocks when they are down just to pay your electric bill, giving your growth assets time to recover.

• Tool #4: A Long-Term Perspective. Remind yourself that bear markets are a normal, healthy part of the economic cycle. As the "By the Numbers" section shows, the historical odds are overwhelmingly in favor of the investor who can remain disciplined and focused on the long term. A simple, understandable plan is often the easiest one to stick with when emotions are running high.

A Framework for Managing Market Risk

Strategically, market risk is the unavoidable volatility you must accept to earn the long-term growth needed to fund retirement. The danger is that a severe market decline, especially early in retirement, will trigger a poor sequence of returns, forcing you to sell assets at low prices and permanently damaging your portfolio’s longevity .

A resilient plan is designed to manage your reaction to this volatility, not to avoid the risk itself. The primary defense is a proper asset allocation, using a diversified mix of stocks and high-quality bonds to cushion your portfolio during downturns . This is complemented by a cash reserve or "bucket strategy," which creates a buffer to cover living expenses, ensuring you never have to sell your growth assets into a falling market.

Conclusion: The Great Balancing Act

The journey through retirement requires a powerful growth engine to outpace inflation over a long lifespan, and that means owning stocks. The fundamental trade-off of market risk is accepting short-term volatility in exchange for the potential for long-term growth. The "great balancing act" is building a portfolio and a mindset that allows you to tolerate those gut-wrenching downturns without abandoning your plan. By focusing on what you can control—your asset allocation, your rebalancing discipline, and your withdrawal strategy—you can build a vessel that is strong enough to weather any storm and carry you safely to your destination.

Create Your Financial Compass with Us

Market volatility can be terrifying, but it doesn't have to derail your retirement. We specialize in building durable, all-weather portfolios and providing the disciplined guidance our clients need to stay the course. If you're ready to build a plan you can stick with, contact us today.

Resources:

• FINRA (Financial Industry Regulatory Authority): Offers tools and articles for investors on market volatility and risk management. (www.finra.org)

• U.S. Securities and Exchange Commission (SEC): Provides investor bulletins on the importance of diversification and long-term investing. (www.investor.gov)

• Vanguard Investor Education: A deep resource for understanding asset allocation, diversification, and the principles of long-term investing. (investor.vanguard.com/investor-resources-education)