The Invisible Risk That Decides Your Retirement

Why how investors behave matters more than what markets do and what disciplined portfolio structure can do about it.

There is a statistic buried inside Russell Investments' 2025 Value of an Adviser research that deserves far more attention than it normally gets. Of the estimated 5.6% per year in value that a good Australian financial adviser adds for their clients, the single largest measurable component is not picking the right stocks, not optimizing tax, not building a smarter asset allocation. It is behavioral coaching. Keeping investors in the market, disciplined and focused, when everything around them is screaming that they should get out.

That one thing, call it coaching, call it restraint, call it the management of human nature, is worth an estimated 3.1% a year. More than asset allocation and tax planning combined. That number alone should reframe every conversation about what advice actually does.

The Gap Nobody Talks About

The same research turns up a finding that, once you see it, is difficult to unsee. When advisers are asked to name the top benefit of professional advice, 70% of them say it is helping clients avoid costly mistakes. When clients are asked the same question, they rank it seventh.

The most valuable thing the relationship provides is the thing the client notices least. Until a market falls, at which point it becomes the only thing that matters.

This is not a peculiarly Australian insight. It reflects something universal about how people relate to money and to risk. Markets are abstract until they are not. When they are not, when a portfolio is down 20% and the headlines are catastrophic, the human mind does not respond with calm probabilistic reasoning. It reaches for the exit. And that instinct, entirely rational from the perspective of immediate emotional relief, is one of the most reliable destroyers of long-term wealth in existence.

What Getting Out Actually Costs

The numbers here are brutal, and they need to be stated plainly.

Over the decade to 31 December 2024, a fully invested position in the S&P/ASX 300 turned a $100,000 starting balance into $226,459. Miss the ten best trading days over that same period. just ten days in ten years, and that $226,459 becomes $145,176. The difference between staying invested and panicking at precisely the wrong moments is more than $80,000 on a six-figure starting position.

The difficulty is that the market's best days cluster right next to its worst. They occur in the same periods of extreme volatility, the same weeks when the news is most frightening and the urge to sell is at its most powerful. The investor who exits to protect themselves during the bad days almost inevitably misses the recovery. The cost is not hypothetical. It is permanent.

Illustrative example: Cost of missing the 10 best days
(S&P/ASX 300 Total Return Index, 10 years to 31 December 2024)

Source: Morningstar. Past performance is not a guarantee of future performance.

In Retirement, the Math’s Gets Worse

The drawdown phase of retirement changes the nature of the problem significantly. When an investor is still accumulating, a market fall is a setback. It is painful, it may be frightening, but time is still on their side. Contributions continue, prices are lower, and the sequence of events over a long career eventually smooths out.

In retirement, that buffer disappears. The sequence of returns becomes a trap rather than a feature. A significant market fall in the early years of retirement, combined with the regular withdrawal of income to live on, locks in losses at precisely the moment when there is no capital coming in and limited time for recovery. The order of returns sets the trap. Behaviour springs it.

This is why the question of how a client is likely to behave under pressure is not a soft, secondary concern. It is the structural foundation of any retirement income plan worth the name.

The Hard-Wiring Problem

These reactions are not failures of intelligence. They are the output of cognitive biases that are deeply ingrained in human psychology, evolved over millennia in contexts where short-term risk avoidance was often the right answer. In financial markets, the same instincts tend to produce exactly the wrong outcomes at exactly the wrong times.

Common behavioral biases and how to manage them

Behavioural bias	What it does	How to manage it
Loss aversion	Losses are felt about twice as strongly as equivalent gains.	Anchor to long-term goals and cumulative outcomes, not point-in-time falls.
Herding	Following the crowd, especially at market highs and lows.	Stick to a personalised strategy; the crowd rarely times it well.
Recency bias	Over-weighting recent events over long-term trends.	Review performance over meaningful timeframes; use history for context.
Overconfidence	Overestimating one's ability to predict markets.	Rely on evidence-based frameworks and professional advice.
Availability bias	Leaning on vivid, recent information (e.g. headlines).	Decide on comprehensive analysis; filter out the noise.
Anchoring	Fixating on a reference point such as the price paid.	Reassess on fundamentals: 'would I buy this today?'
Confirmation bias	Seeking evidence that supports existing beliefs.	Actively seek opposing views; play devil's advocate.
Status quo bias	Preferring to leave things unchanged.	Schedule reviews; use data to justify adjustments.
Sunk cost fallacy	Holding on because of what's already been committed.	Decide on future value, not past investment.
Hindsight bias	Believing past events were obvious in advance.	Keep a decision journal; focus on process quality.
Framing effect	Choices change with how information is presented.	Reframe decisions several ways; focus on absolute outcomes.
Choice-supportive bias	Over-praising past choices and downplaying flaws.	Review past decisions honestly to check the reasoning.

 

Source: Lonsec Investment Solutions

 

Naming these biases matters. Not because naming them makes them disappear, they are hardwired, and no amount of good intentions entirely removes them, but because understanding them allows both advisers and clients to design a framework that accounts for them in advance.

Two Levers, Not One

Lever 1 — Change the fall (structure)	Lever 2 — Change how big it feels (coaching)
Make the drawdown the investor actually experiences smaller, so fewer panic triggers are pulled. This is the role of disciplined portfolio structure with embedded downside protection.	Coach the investor so a fall registers in proportion — so a 20% fall doesn't feel like one-fifth of a disaster. This is the role of education and the right conversation at the right time.

 

The conventional response to behavioral risk is more coaching. Better communication. Clearer explanations of long-term data. All of that matters. But there is a second lever that often goes underused, and it is arguably the more powerful of the two.

If coaching helps investors respond better when markets fall, portfolio structure determines how large those falls feel in the first place. A client who experiences a 10% drawdown is in a meaningfully different psychological position to one experiencing 25%, even if the long-term trajectory of their portfolio is broadly similar. Smaller falls require less emotional discipline to sit through. The coaching has less work to do.

This is the principle behind the Gyrostat Retirement Portfolio Resilience approach referenced in Lifestyle Asset Management's research. The concept is not complicated: always-on downside protection, embedded within portfolio structure rather than applied reactively, means the falls clients actually experience are smaller. And smaller falls mean fewer panic triggers that behavioral coaching has to manage. The two levers pull in the same direction. Used together, they are considerably more powerful than either is alone.

Turning This Into Practice

Lifestyle Asset Management's approach to this problem is built around a simple but important insight: the best time to prepare a client for a market fall is not during one. When the market is calm, the conversations that matter most are possible. When the market is falling, they are almost impossible.

That means surfacing risk before it arrives. Asking clients not what they would do if markets fell, but what they actually did the last time. Pre-experiencing a hypothetical early-retirement decline before retirement begins, and sizing any protected allocation to the client's real behavioural vulnerability rather than their stated risk tolerance, which is a different thing entirely. Measuring falls against the income plan rather than the market peak, so that a 20% drawdown registers in proportion to what it actually means for someone's retirement income, not as an abstract percentage of a number on a screen.

And, critically, pre-committing. Agreeing in advance, while conditions are stable and the mind is clear, exactly how the client will respond when markets move against them. The decision is then already made when it counts, and it was made at the right time by a person who was thinking clearly.

A 20% fall is one-fifth of a number. It is not one-fifth of a retirement.

The Bigger Point

The investment management industry spends an enormous amount of time, energy and intellectual capital on portfolio construction, factor exposure, fee optimization and tax efficiency. These things matter. But the research suggests that none of them, individually or in combination, matches the value of keeping an investor invested and on course through the moments when everything around them suggests they should not be.

The battle for retirement outcomes is not won primarily in the markets. It is won in the relationship between an adviser and a client, in the quality of a portfolio's structural resilience, and in the decisions made or not made on the days when the market gives investors every reason to act. That is where the real prize sits. And it is where the difference between a good outcome and a poor one is most often decided.

Sources: Russell Investments, Value of an Adviser, 2025 (Australia); Morningstar (S&P/ASX 300 Total Return Index); Lonsec Investment Solutions (behavioral biases); Gyrostat Capital Management (Retirement Portfolio Resilience); Lifestyle Asset Management.