Mo Vidwans
By Mo Vidwans
We all dream of making good in our investments, year in and year out. We boast about it, on occasion, when our choices of investments are doing exceptionally well and keep hoping that these investments will continue to prosper forever, totally unimpeded. But do they really?
They can, but we must be very realistic about it. When we talk about investments, we generally talk about the stock market. There are many other kinds of investments too, starting with most conservative like CDs and on to most speculative like private equity. And there are many layers in between like bonds, preferred stocks, real estate market in certain areas and investments in private small businesses; all with varying degree of risks and speculation associated with it. Each one of these investments brings with its own form and level of risk and the key thing in all these investments is to properly understand them and determine which risks can be understood and borne by us, the investors, without affecting our health, family life and/or financial safety. It is a very hard thing to do but somehow, we must reach that point to be at ease with our own decisions about these matters.
I have seen and certainly heard many disasters happen if such precautions are not taken. If we just look at the recessions, small and big, that US economy went through over the last 30 years (that is enough to put a point across but I can go beyond). There have been a few: 1991-92, 1997-98 and few in 2010s were small ones and then 2000-02 and of course the big one in 2008-09, and then what we are experiencing now. We will find that people get panicky, nervous and forget the fact as to why they invested the way they did in the first place. When the subject comes up with the clients about their “tolerance risk” the first question I ask is how you handled the recession of 2008-09. I get a giant mix of answers, but the general trend always is that they sold most of the investments or something very similar; those who didn’t do anything at all were the winners. Yet, if I probe further, they were very happy when the stock market was doing well. Someone said this is akin to a fair-weather friend definition. As a contrast to that a friend of mine tells this story about his client who was a dare devil high flying sky jumper but when the time came to invest his money, he was most conservative. Figure that out!
Understanding our mindsets well is very critical, important and a major step in our investment process. The name given to it in the financial planning lingo is “risk tolerance” and I can say that it is not easy to determine unless the person knows himself/herself well. A cornerstone of any investment plan is understanding one’s tolerance for risk. A strategy with high returns is never optimal for an investor who lacks the ability to stick with it especially in bad times.
A few factors determine how much volatility in portfolio returns you can withstand. They are:
• The timing as to when you will need the money to spend on your goal.
• The length of period over which you anticipate withdrawing the money.
• Is the money required in lump-sum or over a certain period.
• Your psychological ability to cope with up/down markets.
• Your knowledge of investing.
The last item is rather critical because not all investments are as liquid as you may wish them to be and depending on the urgency of the need requirement, that factor can be critical. An example of that would be if a major part of your investments is in real estate and a need arises for the tuition fees for your child or a need to buy a car then it might be difficult to cash some investments immediately.
Our life after retirement has stretched out now to somewhere between 20 to 30 years, which is quite a contrast to what it used to be even just a generation ago and which also has affected the Social Security fund management. When they started doling out their payments back in 1934-35 timeframe their calculations did not account for such long life after retiring. The point here being that if we are going to depend on our own savings then we need to account for a long life and make sure that the money will last that long. For this to happen, it is almost imperative that the money should grow at a reasonable clip to last that long and perhaps beyond. This is where determination of your risk tolerance becomes critical.
There are other forms of investments too if we determine that our risk tolerance is not the one to depend on. There are many different forms of annuity contracts available now which are quite different from the old ones. Now, I am not a big fan of annuity contracts, but it is determined that generally for about 10 percent of the population in the retirement predicament, annuity is the best thing to do. There are reverse mortgages which themselves have gone through many changes recently and are now more palatable to the end users.
As it is mentioned before in this column, managing your own expenses and health in retirement is a major factor in determining how much withdrawal would be needed. Those two factors are not something you start managing after you retire, they need to be managed long before one retires.
Mo Vidwans is an independent, board certified financial planner. For details visit, VidwansFinancial.com, call 984-888-0355 or write to: mpvidwans@yahoo.com.
