Retirement expert notes the ‘biggest behavioral mistake’ investors are making now — don't let it derail your long-term plans

However, translating worry into panicked decision-making — like going all cash during a market correction — could derail your long-term plans.

“The biggest behavioral mistake is turning legitimate economic concerns into an all-or-nothing investment decision,” Steve McKay, Head of U.S. Retirement, Insurance and College Savings at Franklin Templeton headquartered in San Mateo, CA, told MarketWatch.

Here’s what to consider before making an “all-or-nothing” investment decision.

The risks of leaving the market

Today’s retirement investors have legitimate concerns, despite the fact the S&P 500 is nearing all-time highs — thanks, in large part, to the AI investment boom.

But Morningstar points to “weakness under the surface of the stock market, where tariffs, inflation, surging energy prices and higher borrowing costs have taken a toll.”

Nearly 60% of individual stocks in the index were down 20% or more from their all-time highs in August, according to Morningstar, while many “battered S&P 500 stocks have been volatile” — moving up and down over the past few months by 20% or more.

Several veteran investors, market experts and economists are also warning of a potential AI bubble burst.

So, for retirement investors, it can be tempting to look for an exit strategy — like going all cash to protect your nest egg. But leaving the market comes with risks, too.

“For a retirement investor with a 20- or 30-year horizon, purchasing-power risk and opportunity cost are risks, too,” McKay told MarketWatch.

Leaving the market could erode your purchasing power over time, making it harder to sustain your current lifestyle 10, 20 or 30 years down the road.

Moving to cash “solves the wrong problem,” writes Keith Demetriades, an independent fiduciary financial advisor at Kingsview Partners in Pampa, TX, in a post, explaining that volatility itself isn’t the issue.

“The bigger issue is what volatility causes people to do: selling at the wrong time, abandoning a plan, missing the recovery, or becoming so conservative after a decline that the portfolio no longer has enough growth to support a retirement that could last 25, 30 or even 35 years,” he wrote.

As McKay points out in his interview with MarketWatch, today’s attractive cash yields are temporary.

“A money-market fund, Treasury bill or high-yield savings account may offer an appealing rate today, but when short-term rates fall, that income resets quickly,” McKay said.

What you can do instead

McKay says investing in a stable value fund may be a better alternative for capital preservation. This is a low-risk investment option available in retirement plans such as 401(k)s, 403(b)s and 457 plans that combines bond portfolios with insurance contracts — with a goal of protecting your principal while offering steady returns.

“An allocation to high-quality intermediate-term bonds lets you lock in today’s yield for longer and can appreciate if market rates subsequently decline,” McKay explained.

Diversification is another strategy, in which you spread your investments across asset classes, industries, sectors and geographies.

But, “true retirement diversification isn’t just about how many investments you own,” writes Demetriades. “It’s about how those investments behave when markets are under stress.”

He says building a resilient, diversified portfolio for retirement includes “some parts designed for growth, some for stability, some for income and some for flexibility.”

As Demetriades points out, a resilient portfolio should give you enough flexibility to avoid emotional decisions, while supporting your income needs during a difficult market and allowing you to maintain growth potential.