Back to the basics for investing

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No easy path to long-term financial success

For a few wild, delirious years, investing seemed glamorous and easy.
One merely had to dabble absentmindedly in equities, snapping up the latest hottest stocks like so many baubles in a jewelry store, and then sit back and count the glittery profits.
But reality has checked into the hotel to stay.
And people are far more risk averse than they are risk tolerant.
“Investors become risk averse as soon as they lose 15 percent,” said Denisa Tova, founder and CEO of DaVinci Financial Planning Inc. “But it takes substantial gains — 40 to 50 percent — to rebuild their confidence.”
Which explains why she doesn’t lend much credence to questionnaires that “attempt to quantify risk tolerance — risk tolerance is cyclical,” she said.
It bears repeating — because so many investors lost sight of this during the stock market crash of 2008 and the recession — that “investing is never a short-term deal. We need to return to long-term basics,” Tova said, which includes “revisiting” goals.
“Just because the market environment has changed, doesn’t necessarily mean that your goals have,” she said.
And — news flash — risk and return go together.
“They cannot be separated, no matter the environment,” Tova said.
Investors who cannot tolerate a 40 percent loss “should not be in a more aggressive portfolio — hoping losses won’t happen while enjoying 10 percent annualized gains,” she said.
And despite all those self-help books Americans have been reading — the stock market defies them, too.
“People should do the opposite of what their gut tells them — so they should buy low and sell high,” Tova said.
But, of course, that’s easier said than done. So, a bit of learning may be in order.
“Allow yourself to be educated by a financial planner or someone you trust about what’s best for you, your goals,” Tova said. “Then stay the course — and keep emotion out of it.”
And part of saving for retirement includes assessing the various financial resources that are available.
“Expected retirement income sources are very generational,” said Kevin Kaveney, managing director of Northwestern Mutual’s local office.
Traditionalists and some baby boomers were able to expect pensions, employer-sponsored retirement plans and Social Security — more of a single-stream of retirement income.
However, many younger baby boomers, not to mention Generations X and Y, are realizing that times have, indeed, changed.
“After the recession (started), people now more than ever realize they will be responsible for a greater portion of their own retirement,” Kaveney said. “Many of our clients have an inkling that they don’t want all of their retirement in their employer-sponsored plans.”
More and more, retirement will need to be pieced together from multiple streams.
“The younger generations are more self-reliant and less trusting that an employer or Uncle Sam will take care of them,” Kaveney said. “And they’re more likely to seek professional assistance to close the gap between where they want to be and where they are.”
If anything, there’s been one upside to the recession.
It’s caused a “flight to quality and safety.” Investors are recognizing the need for diversity among asset classes, and are more apt to recognize the need to save and invest.
“People are starting to reassess how they live,” Kaveney said. “They’re saving more, and they’re more cognizant of the financial ratings of companies — moving investments to more stable companies.”
Some investors feel safer rolling over their retirement funds into a traditional Individual Retirement Account, or opting to invest in mutual funds or whole-life/permanent insurance — or all of the above.
As for those still frozen with fear and not convinced that the economy is starting to recover — well, “it’s not the first downturn,” Kaveney said. “We’ve had wars, recessions, depressions, sector crunches, etc. this is not the first — and it won’t be the last — but, long term, the economy continues to produce.”
At this point, there is reason to be “cautiously optimistic,” he said.
Long-term strategies to keep in mind include goals, time horizon and risk tolerance — all of which are essential to investing.
He recommends that investors balance optimism with caution, while having confidence that the system will work; doing one’s homework; enlisting the help of knowledgeable and competent advisers; and being patient.