The Costliest Mistake Investors Can Make

Retirement portfolios have never been more sophisticated. Quantifiable risks have been modeled, hedged and systematically defended against. Yet one challenge can still undermine even the most refined approach: the risk that investors abandon their portfolios.

This behavioral tendency is called abandonment risk. “It is, very simply, the risk that participants abandon their retirement investment strategy during market stress,” explains Mike Reidy, Client Portfolio Manager at Principal Asset Management. “What makes it devastating isn’t just that investors sell—it’s when they sell.”

This flight-to-safety instinct runs deep. When uncertainty strikes, moving to perceived safety feels rational and protective. In long-term investing, the instinct often leads to portfolio abandonment.

The Covid-19 downturn made abandonment risk dynamics particularly visible. Faced with extraordinary uncertainty, many participants opted to adjust their retirement portfolios, and transaction activity surged 3.5 times the usual level. Unfortunately, much of the activity involved de-risking portfolios, reallocating from growth assets into cash or cash-like investments, precisely at the very trough of the market. 

The challenge of abandonment risk is amplified by repetition: Since 1980, markets have pulled back by 10% or more 58 times, giving investors more than one chance each year to feel pressure and potentially make the same costly mistake. 

Principal Asset Management research reveals that the consequences of abandoning a portfolio can be more costly than the initial emotional response.

The April 2025 market disruption—triggered by President Trump’s “Liberation Day” tariff announcement on April 2—offers another case study in abandonment dynamics. While most participants held their positions during the downturn, those who de-risked proved costly in their timing, abandoning positions mere days before April 9, which delivered the third-largest gain for the S&P 500 since World War II. 

The behavioral ripple effects compound the damage. “The psychological barrier to reentry is formidable,” Reidy explains. “Participants sell, watch markets recover—and by the time they recognize their error, they’ve missed substantial gains.”

This can create a costly cycle: Participants who make selling decisions during downturns face the emotional impossibility of buying back in at higher prices, leaving them stranded in cash while markets recover without them.

Market recoveries often follow recognizable patterns. Investor behavior, by contrast, can often be reactionary and inconsistent.

This mismatch creates a fundamental design challenge that many portfolio managers overlook. Principal Asset Management takes a different approach: engineering portfolios that account for behavioral reality, recognizing both the drivers of abandonment and how risk tolerance varies significantly across age groups. 

Research from Principal Asset Management has also identified behavioral patterns that occur during periods of market stress across different age cohorts, and developed specific abandonment risk thresholds for different age groups. These insights enable more precise risk calibration for portfolio managers—increasing equity exposure where participants can withstand volatility, while reducing it for age groups more prone to abandonment behavior.

“We test our target date glide paths against real-world participant data to understand: Did we introduce abandonment risk by increasing the overall risk within the portfolio? We feel we have a fiduciary responsibility to build this into our process,” says Reidy.

To help participants achieve financial security in retirement, managers must construct portfolios balancing mathematical optimization with real-world participant experience. The math is unforgiving: In an industry where success is measured in basis points, abandoning one’s retirement portfolio during brief moments of market turbulence can undermine years of portfolio optimization.

The most sophisticated portfolio design means nothing if participants abandon it when volatility strikes.