By Elizabeth O'Brien

It may be tempting to seek safety when markets get rattled by the unknown. But high levels of uncertainty can actually be positive for stocks -- something to keep in mind for your retirement portfolio.

Some of the best stock returns have come when economic uncertainty was the highest, according to Jim Paulsen, an economist and former chief investment strategist at Wells Fargo and Leuthold Group.

"Uncertainty" is a squishy term. For his research, Paulsen used the U.S. Economic Policy Uncertainty Composite Index, a tool that includes references to economic uncertainty in newspapers, expiring tax provisions, and disagreements among economic forecasts. Comparing that index to the S&P 500 from 1985 to 2025, he found that stocks returned an average 19% when uncertainty was in its highest quintile versus an 11.6% return the rest of the time.

The current bull market -- coinciding with a spike in uncertainty as President Donald Trump took office -- is a case in point. The S&P 500 is up 18% since Election Day on Nov. 5, 2024. At the same time, uncertainty has sat in the highest quintile 43% of the time, more than double the average before October 2022, Paulsen wrote in an article on Substack.

Granted, Trump is rattling markets. The "sell America" trade revived this past week over Trump's threats to take Greenland, warning of more tariffs on European countries. U.S. stocks, bonds, and the dollar fell, while gold pushed to new heights.

Yet the long-term trajectory for stocks suggests that investors needn't wait for clarity before putting money to work. In fact, those who do will probably miss out.

That's good news because corporate leaders are sounding unsure about the future. Uncertainty ranked as the top economic concern for America's CEOs for 2026, according to a new poll from the Conference Board. Some 43% of respondents ranked uncertainty as a top threat, followed by 35% citing the risk of a downturn/recession.

For retirees, it's natural to become more cautious when it comes to investing. "I think as people get older, you get more scared," Paulsen, 68, tells Barron's.

But don't let fear put your portfolio into a defensive crouch. Retirees should have an asset allocation that "takes them out of harm's way," Paulsen says, but once you have that set, you shouldn't let the headlines sway you.

There's no one-size-fits model. It depends on your goals and risk tolerance. Many advisors use the classic portfolio of 60% stocks and 40% bonds as a starting point, then dial it up or down based on circumstances. For example, retirees who have their essential expenses covered by a pension can generally afford to take on more risk in the stock market and may opt for a higher equity allocation.

In your equities portion, make sure to own "old era" stocks, Paulsen says. These are areas like small-caps and deep value stocks -- segments of the market that have lagged behind the S&P 500 as tech stocks dominated in recent years, he says.

The Vanguard Small-Cap exchange-traded fund offers ultralow-cost exposure to that segment of the market, taking a traditional approach of weighting stocks by market cap. The less conventional Dimensional U.S. Targeted Value ETF takes a more targeted approach: it emphasizes stocks that trade at a low price relative to book value or earnings; at nearly 30%, its largest sector is now financials.

That may be a solid bet at this juncture: small and regional banks tend to benefit as the Federal Reserve cuts interest rates, which may continue in 2026. "What the old era needs is policy juice, and we're starting to get a little of that," Paulsen says.

As scary as the headlines can be, everything in the news is generally a risk that has already been digested and priced into the markets. Markets tend to "climb a wall of worry," as the adage goes, as worst-case scenarios don't pan out and things get incrementally better.

A better time to get nervous is when investors are complacent and everything seems calm and easy, Paulsen adds.

Whatever you do, don't try to time the market.

Laurie Bodisch, a financial advisor and founder of Her Wealth Coach in Boiling Springs, Pa., says she has seen skittishness among older adults who lived through the Great Depression and their offspring.

"They sell at the absolute worst times," says Bodisch. Young adults whose market experience has primarily involved big gains can be equally prone to bailing out of stocks at the first sign of volatility, she adds.

Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com

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(END) Dow Jones Newswires

January 23, 2026 21:30 ET (02:30 GMT)

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