A senior couple take a closer look at their finances before deciding whether or not to exit the stock market.BERNARD BODO/iStockPhoto / Getty Images
With the recent collapse in the price of bitcoin and ongoing talk of an AI bubble, many investors are understandably nervous about holding a large position in stocks. This is especially true for retirees who no longer have an outside source of income to soften the impact of a capital loss. The conventional wisdom is to stay fully invested, but is that necessarily the right call?
Consider two retired investors, Lynn and Steve. Both currently have $100,000 invested in a core S&P/TSX Composite Index ETF. Lynn plans to stay fully invested over the next 12 months. Steve, however, wants to avoid an investment loss at all costs, so he moves everything into cash. His plan is to buy back into the stock ETF in 12 months’ time, or perhaps sooner, after the S&P/TSX falls 20 per cent.
To see who is likely to do better over the next 12 months, let’s look at what the S&P/TSX did between July 1, 1979, and Nov. 1, 2025. During this period, there were 545 12-month periods spaced one month apart.
The chart shows the difference between Steve’s account balance versus Lynn’s at the end of each period. If the point is below zero, it means Lynn did better. For instance, in the period starting March 1, 2003, Lynn would have been ahead of Steve by $38,550 after 12 months. That is because the S&P/TSX generally rose during that time.
If we make the same comparison over all 545 periods, it turns out that Steve would have been ahead of Lynn just 31.3 per cent of the time. On average, Lynn’s account balance would be $6,350 greater than Steve’s after 12 months. This analysis suggests one should stay fully invested.
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But that isn’t the full story. In fact, Steve is not necessarily wrong. Granted, he would have been right only 31.3 per cent of the time, but that assumes each 12-month performance has an equal chance of materializing. If we focused only on periods like the present environment – when market valuations are stretched – the chances of Steve profiting from a temporary exit from the stock market might be significantly better than 31.3 per cent.
Even if Steve guesses incorrectly about a market correction, he still has his $100,000 (more or less) at the end of 12 months. What he has lost is the opportunity to have done better. While opportunity cost is important, it is not as painful as a real loss, especially for retirees.
In summary, retirees who truly believe a stock market correction is looming might reasonably consider reducing their equity positions now, but with some caveats. First, it would be too extreme to sell everything, as Steve has done. Even retirees should maintain some exposure to equities.
Second, if you do cash in some of your equities, you need to make a well-defined commitment to return to a fully invested position, either after a fixed period of time or after the market has fallen by a certain percentage. You can’t stay out of the market forever.
Frederick Vettese is a former chief actuary of Morneau Shepell and the author of the PERC retirement calculator (perc-pro.ca)