Nifty Finance Site

It's no surprise that Google would offer a nifty financial site. This one, Google Finance, offers an in depth guide to companies, stocks, mutual funds, currencies and the like. It also contains links to relevant news releases, trends and sector summaries. To view international companies, there are similar sites like Google Finance U.K., Canada, etc.

As a long-term buy-and-hold investor, I do not advocate daily checking of stocks, portfolios nor performance. This site could be useful on a macro level for a LMF4HMW reader looking for information and knowledge about finance and the markets. Or on a micro level to view a particular index's performance over time, such as the MSCI EAFE or S&P 500.

In honor of tonight's celebration and the New Year we're welcoming tomorrow, I recommend Cristalino, a delicious Cava from Spain that offers a tremendous value.

Fail to Plan, Plan to Fail

Last night while discussing an annual off-site strategy meeting for my business, it occurred to me that individuals could benefit from doing something similar for their financial planning. Taking time out and outside of the box (i.e., moving to a different location to stimulate creativity) to brainstorm and formulate a strategic plan is a familiar tactic for successful businesses. So how does a LMF4HMW reader use an off-site strategy meeting to enhance her financial position? Below are some simple steps:

1. Take it seriously. Put an hour appointment on your calendar to plan the meeting. In this hour, you'll decide on topics for discussion (if it's a family plan -- i.e., you and a spouse or significant other) or further thought (if it's solo mission). These might include cash management/budgeting, debt service/payment plans, wealth building strategies, goal setting, evaluation of 2008's performance, etc. At this point you're merely deciding on the topics, not tackling them -- that's for the off-site.

2. Create an agenda. Decide where you'll go, perhaps to a night away or a more simple location such as a quiet restaurant. Plan your time given the topics above. How long will you tackle each topic? How will you record your thoughts? (I love using colored markers and big white sticky "Post it" style notes -- buy them at an office supply store.) I suggest that you divide the topics into separate sessions if possible to avoid burn-out. Gather any notes or files you'll need.

3. Mix in some fun. Maybe you're going to a spa hotel? If so, be sure to book an appointment -- businesses always blend some relaxation or fun into the equation which helps stimulate the creative thought process. If you're dining out for the day, perhaps drive to a different town and combine the trip with an invigorating hike.

4. During the meeting, employ the "Happy Tree". No fair using blaming or negativity. This off-site is a chance to brainstorm in the "happy tree" (think Will Ferrel and his new bride in the therapist's office during Old School). I'm not suggesting that you ignore any failed moves or mistakes from the past, only that you don't use blame or negative words during the discussion. If yours is a group, appoint a mediator and a note taker. If it's a solo mission, write out your "rules" beforehand and be sure to take notes.

5. Follow up! Don't let all of your hard work go to waste. One of the most important steps you can take post meeting is creating a plan for implementation. Again, pick an hour to write a formal plan for attack. During this time, check with your accountant to see if it's a deductible expense -- if you're discussing any side business you might have, it should be. So save those receipts!

6. Check in on your progress. Put a 30 minute quarterly review appointment on your calendar to assess your performance. Get yourself back on track if you fall of the wagon. Or reward yourself if you're progressing well.

This commitment to your financial strategy for 2009 means that you're much more likely to succeed. And if you achieve your goals beyond your expectations, the 2010 planning meeting can add a little more fun!

"He's Makin' a List... So Should You!"

Santa has been busy making his lists, and his better half is likely juggling quite the good wife act frantically planning dinner parties, cleaning the house, preparing the sleigh and (hopefully) keeping the "fun" in the dysfunctional Claus family Christmas.

As the season's cheeriest couple tackles the holidays, I urge LMF4HMW readers to start making a list of their own -- a 2009 goal commitment sheet.

I'm not calling your goals "resolutions" for a simple reason -- these financial commitments are not made to be broken. They are identified, written, agreed to and planned for. This list need not be long; it must only be specific. In fact, I urge you to keep it shorter and focused on a limited number of BHAGs (Big Hairy Audacious Goals or a corporate HR favorite). Below are four simple steps:

1. Identify your most pressing financial needs. Are you in debt? Saving adequately? Unaware of or avoiding your complete financial picture?

2. Write down your specific goal(s). For example, "pay down $8,000 in credit card debt", or "refinance car" or "revisit my investing strategy and lock on a better long-term plan".

3. Commit to the goal(s) with specific, measurable tactics and a timeline for achievement. This might be "pay $500 monthly to credit card to decrease debt by $6,000 and use $2,000 of bonus to cover final payment by December", or "research refinance options in January, contact preferred providers in February and lock on deal by end Q1".

4. Put the above appointments on your calendar to create accountability. Stick to them! For extra good measure, I recommend your keeping a signed copy near your home work area or as a file in the calendar reminder.

Following these four steps will ensure that you're on Santa's "nice" list come 2009 gifting season. And more importantly, doing so will provide a true and lasting gift to yourself.

Pausing to Give Many Thanks

There's a lot of less than cheery news out there. People are "worried", "fearful", having to "cut back", etc., etc. This isn't surprising since all it takes is the push of an "on" button to hear or watch news about the next development in our "global economic crisis". It's even more depressing for those pain and drama seekers hell bent on checking on their investments day after day.

So what does a LMF4HMW reader have to be thankful for on this day before a national ode to Thanks? A lot.

Clean Water. Many in this world do not have this basic source of life that we take for granted every day. Ditto food, shelter, and a warm bed. How rough must it be for those going to "bed" hungry on the cold streets? Freedom. The U.S. is an incredible country. It seems that many focus on tearing it apart and sadly, it can be easy to forget the sacrifices made by our service men and women. Education. It's an investment with a sky-high, linear return. Family, friends and loved ones. Without them, life would be so much less rich. Health. If you found out you had a terrible, life-threatening illness today, would a portfolio return, work project or anything that's currently frustrating you really matter? Time. Every minute of every day is precious. And we get to choose how to spend it given our gifts of freedom, education, health and those with whom we have meaningful relationships.

Spend some time during the next day thinking about how truly lucky you are to have the aforementioned gifts. Ponder how you might best give something of yourself. And how you can develop gratitude and peace given these benefits. Most of all, pledge to think more this way in your life throughout the year -- not just on this very special day of Thanks.

The Santa-Grinch Spectrum

SANTA

Pros- everyone loves ya; lots of cheer awarded to loved ones
Cons- habitual over spender; paying a lot more for cheer given financing costs

VS. GRINCH

Pros- never over spends; no credit card debt

Cons- black sheep of gathering; nothing in return

So which one are you during the holidays? Big bubbly Santa with tons of gifts and a big Visa hangover come January? Or Grinch with a dour predictions and a feeling of loss as the New Year rings in?

Most cheery Americans and HMW tend to be Santa-like. We grow up bombarded by holiday "spend, spend, spend" messages. The music starts playing in the stores in October and is downright ear numbing by December." This predisposition is actually great for our consumption- and service- based economy. But it's not so great for our wallet. Nor the waist as it turns out -- it's no coincidence that over-spend and over-eat/drink are partners in crime.

As a LMF4HMW, I'm certainly not advising that you become a Grinch. How would we put the "fun" in dysfunctional during all those holiday gatherings without some good cheer? I'm merely suggesting that you create a plan before the merriment officially begins and stick with it no matter how many eggnogtinis you down before embarrassing yourself in front of your mother-in-law. The following are a few ideas -- I'm sure you can come up with more:

1. Make a good old fashioned budget. Decide for whom you're buying and how much. Be sure to total it so that you can see how much you're actually spending -- $50 times 20 gifts seems a lot less brutal than $1000 line item on a bill. That way, when you're a couple of drinks in at the shopping mall (or online -- who has patience for those lines?!!) you're not side-tracked by the latest-greatest-three-times-what-you've-planned-to-spend-she-deserves-it(buy me!)-what-the-hell-it's-holiday-season gift.

2. Consider a gift exchange. Draw "secret" names between your key groups - maybe one or two circles of friends, the office pool and your family. Set a mutually agreed upon budget per person and enjoy the suspense. Most people will instinctively choose $50 or $100+, which is fine as you're shopping for one not ten. But consider the $15 and under limit because your compadres' creativity might surprise you. One of the best holiday gifts I ever received was a delicious book -- I gobbled it up within a day and could still fit into my skinny jeans!

3. Send holiday postcards - like to send holiday letters and photo cards? I do -- in fact, I'm so into it that I've already received mine for 2008! Save yourself some time and money by sending postcards. VistaPrint has some mighty fine deals and even customizable options.

4. Host potlucks partays - fan of the festive gatherings? Who isn't, really?!! Why not ask each invitee to bring a favorite hometown holiday dish and a bottle of cheer? You'll create quite the assortment and cut way down on your expenses. And you don't have to feel guilty because you're still the one doing all the clean up the next day!

5. Ignore #1-4 above and get seriously real. I recently heard an announcement on the radio about ReThink Christmas. I thought it was about creating donation or charitable type wish lists specifically and more generally promoting the idea of a return to a less consumerism-focused holiday. Turns out that it's that plus more: ReThink is a message started by a church, Advent Conspiracy, which seeks to have people "worship fully, spend less, give more and love all". While I don't tend to be a religious type, the message is quite valuable. Even if you're not Christian or religious. And the bottom line for them is promoting clean water through Living Water.

Even if you don't want to forgo gifting and spending, do spend some time giving the most valuable resources -- serve food, donate water, or build shelter. These are the gifts that truly do keep on giving. And the ROI is beyond calculation!

One of the Lucky Ones...

So consider yourself a very lucky LMF4HMW reader if you meet the following criteria: 1) you're contributing the maximum amount to your 401(k); and 2) you're contributing the maximum amount to your IRA or Roth IRA. You're well on your way to a bright financial future given that you're annually saving $20,500 if you're under 50 and $25,500 if you're older! In addition to the impressive annual savings rate, the powers of market returns and compounding will both boost your investment earnings significantly over time.

So what's a girl who's already a golden LMF4HMW member to do? Splurge on another pair of $200 jeans? Spring for that Fendi bag? Book a trip to Bali? Buy a new luxury car? You're owed some sort of reward, right?!!

The best answer and the commensurate size of your reward depends on your overall financial house. You've earned yourself a significant reward if you meet the following criteria: 1) all of your bills are paid on time, all the time; 2)you have six months of living expenses saved as a SDH* cushion; 3) and you're debt free (i.e., neither Visa nor Mastercard has you in a financial headlock). Trip, car, you name it! If you're quite not there or a ways from this point, the relative size of your treat should be smaller (spa day, anyone?).

For those winning the jackpot given a sparkling financial house, after you've rewarded yourself, it's time to open a taxable account and yes, contribute more. Perhaps it's your bonus or a percentage therefor, the money you save after (finally) finishing paying Social Security taxes each year (that period seems to come later and later), or the raise you get. In any event, you're going to deposit a sum of after tax money and purchase more financial assets.

Any financial planner worth her salt will advise that you look at your entire portfolio (retirement accounts, savings, etc.) to determine the best investments. If your 401(k) doesn't offer a fund with a certain class of stocks (i.e., small cap or mid-cap), or international or emerging market investments, a taxable account is the place to round our your overall portfolio. The easiest thing to do is invest in low cost index or exchange traded funds and plan to hold them for the long term.

Happy splurging and saving!

*SDH - a.k.a.,"sh*t does happen"; job loss, car trouble, family issues, pet surgery, unforeseen problems, etc.

IRA Breakdown

A lot of you probably have an IRA. You might even have two -- for example, a traditional and a Roth. You probably know that in general, IRAs, or individual retirement accounts, are investment vehicles geared for your golden years. But do you know the different types? And are you sure the one you have is best suited for your needs?

There are actually four different types of IRAS: traditional, Roth, SEP and SIMPLE. The traditional IRA allows the investor to contribute pre-tax income (this is good -- it lowers your taxable income) to an account that will grow over time. For example, Mary, who makes $80k, will first contribute $5k to her IRA, and then pay her taxes based on an income of $75k.

The current contribution limit is $5000 for those 49 years of age and younger, and $6000 for those 50 and over. In addition to the tax benefit, the contributions and their earnings grow tax-deferred over time. (This means you won't pay any capital gains nor dividend income tax.) When you do reach retirement and decide to start withdrawing, the money will be treated as income and you'll be taxed. The hope/plan is that you'll be in a lower tax bracket and therefore pay less taxes in those golden years than you would have while working. The other benefit is that of compounding -- there's more to grow over time since taxes aren't being removed from the pool of money.

A Roth IRA is similar in that if offers a haven for retirement earnings, but different in that
it may not be funded with pre-tax income. So if the same Mary from the previous example makes $55k after taxes, her ROTH contribution will come from the $55k. The benefit is that she'll receive the distributions free of tax since she already paid taxes on her earned income before contributing. However, there are income limits for a Roth. If Mary takes a better job and her adjusted gross income rises to $111k, the amount she can contribute is reduced. If her AGI rises to $116k, she is no longer eligible. (Don't get me started on this one -- there is of course no adjustment by the good ole USG for cost of living -- the "rich" woman in New York making $116k is not eligible, but her friend with a $90k salary in Topeka, KS, can contribute.)

SEPS and SIMPLE IRAs are established by employers, usually small businesses. A SEP is a simplified employee pension where the even a sole proprietor can contribute 25% of her net earnings (or $45,000 -- whichever is less). They feature low administrative costs and flexibility -- if a new business has uneven cash flow and doesn't contribute one year, that's okay (although not advised). The earnings grow tax deferred until you start making withdrawals, similar to the traditional IRA.

SIMPLE stands for savings incentive match plan for employees. The employer gets a tax deduction for contributions made and can either elect a flat rate or match a percentage of the employee's contribution. Like with SEPs, the earnings grow tax deferred.

A few final nuggets:
1. The IRS is always changing the contribution limits -- they like to keep everyone on her toes!

2. If you have a 401(k) plan, this doesn't mean you can't contribute to an IRA! In a perfect world, you'd max out both.

3. Malbec is a fabulous wine with which to learn about IRAs. I just tried (and bought a case of) Dona Paula, a delicious chocolaty, raspberry and full flavored wine perfect for crisp fall nights.

Want to loose money? Sell now and go to cash!

There could be no truer, simpler investment strategy than "Buy high; sell low". Yes, I did say that: "Buy high; sell low". If you're investing to get tax write-offs and lose money, that is!

Here's a great example: you read about some fabulous, gang-buster company and decide to buy some stock because hey, "everyone knows it's only gonna go up". A few weeks/months/years later, the performance isn't there, so you sell at a loss and either go to cash or buy some of the next hot item as "it couldn't happen again". You figure you'll make it up next time.

Sound stupid? Yeah, because it is! No one in her right mind would plan to operate in this fashion, but it's amazing how many folks out there do. They're the ones right now who are listening to negative media, walking around morose, "feeling the pain" of those people out there who've lost their etc., etc., etc. and taking on a sympathy depression to cope. These folks are fueling the negative sentiment. (I actually had someone Monday ask me if I'd heard about "the stock market crash"! She wanted to know if I "had had any stocks" and "if so, what was I going to do?" Let's just say that my response of "nothing" received a puzzled look.

I have a healthy emotional balance -- some highs, some lows with mostly positive, even keel, pretty bubbly days. (Health outlook, eating and physical activity deserve the credit.) I don't mind the variety -- especially when I'm downright hyper and loving the energy! But when it comes to investing and matters money, I become the steely-eyed, emotionless accountant type. I am content and rendered stronger by this chosen position. In fact, the worse the news gets, the more content I become. Because I know that the answer is, in fact, to stay the course. Meditate on the peace of doing nothing. Or just do nothing.

Why? Because I developed an investment strategy a few years back. And part of that strategy was sticking to the strategy. We don't know when the market will "recover" (I don't view it as a "recovery" because cycles are normal.), but we do have this set of foundational facts upon which to build a strong strategy:

1. For every rolling 20 year period since the Civil War, stocks have beaten bonds and cash. (Except for one time.) A diversified basket of stocks is still the best investment given a 20 year horizon.

2. Cycles are normal in markets. As the total number gets bigger, the perceived volatility grows. (Ever notice how the media doesn't like to talk about relative percentages, preferring instead to use bigger numbers of points? And how they whiz past the NASDAQ and S&P to report the Dow?) No one ever promised a smooth ride! The smoothest ride of hiding in cash is a downhill grade.

3. No one can really accurately predict the market volatility or cycles. If it were possible, there would be a lot more rich folks walking around. The problem with getting out is that you won't know when to get back in. When is the bottom, the bottom? When is the top the top? These questions are largely irrelevant because the measures are backward looking -- we'll only really know after the fact. (I didn't like philosophy.)

4. Reactive selling is stupid. Really stupid. And not to mention, it's expensive. No one likes to talk about transaction costs, but they'll eat right into a trading portfolio. Every time you buy or sell, there's a fee attached (not so with a 401k unless you're talking about your precious time). So buy and hold. Sell when you plan to sell, not when "the market!!!" tells you to.

5. It's amazing how much sentiment drives the market. Think about that. There are fundamental assets -- the expected growth in dividends backed by actual companies. And their values fluctuate constantly. Let the market and the media be schizophrenic.

6. Investing sooner is better than later. Compounding over time is the best asset you can "buy".

For the roller coaster ride ahead, I recommend a smooth, comforting Willamette Valley Pinot Noir. A to Z Wineworks makes a delicious one for about $20. No corkscrew necessary since it's bottled with a screw cap!

Three Cheers to New Personal Finance Toy!!!

What was your favorite toy as a child? Mine was, I must admit, Barbie. She was hot babe, and I had many of her as well as the full accouterments of all of her houses, cars, outfits, not-as-cute-friends, and even an assortment of weird Kens. (Not bad for city life -- except for the Kens.)

For LMF4HMW readers, the Barbie and Cabbage Patch Kid days are long gone. (Which is fine for the latter -- I hated those things with a passion and remember skipping friends' slumber parties with Cabbage themes -- eew.) Our toys these days consist of clothing, sports equipment, travel plans, and other "lifestyle" items that cost a significant deal more than Barbie's Corvette.

So I'm happy to write about a "toy" from a new(ish) website: Mint.com's online personal financial management system. The site is easy to use, quick to set up, has pleasing graphics and best of all, allows users a free web-based application in which to manage their personal finances. I read about it in Fortune magazine, and I'm happy to report that it exceeded my expectations.

Ok, ok. So a personal finance site's application is hardly a real "toy", but it does allow you to spend more time with the people and activities you love!

Simply go to Mint.com, set up an account with your email address, and then enter financial information on its secure platform. (If you don't yet use your bank's online banking platform, you'll need to set that up, which will take a few minutes per account.) Mint will give you a "trends" overview of your spending and allows you to see everything -- bank accounts, loans, investments, credit cards, etc. in one, easy place. If you elect to enter your credit score (which I didn't), you may receive offerings that could save you money, such as competing lower rates on cards and loans.

The beauty of Mint is that if offers Quicken or Money-like management in a much easier, less time-consuming format. It's fast, free, fresh, fabulous and for an admitted personal finance dork, fun. Which means that it's perfect for LMF4HMW readers!

WARNING: if you overspend in one or more areas, you will be "punished" by some red ink. I spent a good deal of money on business shipping last month and Mint quickly picked up on this. I'm thinking the site might not "approve" of Prada shoes on a less than stellar cash inflow, so beware!

Breaking "Strategery" Down to Tactics

Does the picture to the left look like your home filing system, or lack thereof? If so, my prior post about financial strategy is going to be difficult to implement. I know the new age philosophy is that "some people are filers; others are pilers", but I don't buy it when dealing with your financial house. Having a filing system in place to easily store and access important documents is a relatively easy tactic to check off your list, so take a hour to create a system that will save you hours of time going forward.

I recommend personalizing it, so that the system makes sense to you. If you're uber computer savvy, perhaps you've scanned everything in including documents, receipts, etc. and created computer files. If you're a spreadsheet jockey, then set up an xls to track your expenses with a corresponding file folder to keep track of your receipts. And if you're still living in a paper-filled world, then have a separate envelope for receipts within the folder makes sense. Either way, you'll need to set aside a file cabinet or part of one to get organized financially.

Below are the general categories for your folders -- you may have more or less depending on your particular situation:

1. Home - mortgage or rental docs, insurance, warranties and repairs, etc.

2. Health - insurance docs, will and living will, prescriptions, receipts for co-pays, etc.

3. Car/Transportation - car loan or title docs, toll card agreement, car insurance, copy of your license and registration

4. Banking - copies of your credit cards, statements for checking and savings, etc.

5. Investments - separate folders for each account (i.e., 401k, IRA, Roth, trading account), associated statements, prospectus materials (I don't keep 'em, but you might!)

6. Donations - these are often tax deductible, so it behooves you to keep track of them; remember high school, university, charitable, goods, etc.

7. Memberships - gym, boat club, store card, you name it!

8. Warranties and instruction manuals - I like to keep all these sorts of items in one place as you never know when you might need them

9. Uncle Sam - former tax returns and back up (you are supposed to keep these for 5 years -- it will make your life A LOT easier if you get audited!)

Once you get a home filing system in place, use it. Instead of piling receipts in a corner or tossing them onto your desk, take the moment to place them in the correct space. You'll gain piece of mind from the new control you're exerting over your documents house!

A word to the wise: BACK UP. If you have a computer-based system, be sure to back it up with an online file folder or separate hard drive. The former is available through a number of retailers include Xdrive and IBackUp. The hard drives are at Walmart and the like -- I use one I bought from Target for $80. For your paper files, I recommend a fire proof safe; Walmart has many options ranging between $100-$400 depending on how much space you need.

Whew! For those of you who aren't into organizing (and don't thrive on it like I do), that may have been painful. In this case, I propose a nice red Châteauneuf-duPape, a blend of up to 15 different grapes from France's Southern Rhône region! The blend is predominantly Syrah, Grenache and Mourvèdre, with grapes like Cinsault, Muscardin and Cunoise as vinus seasoning. They're full of red and black fruit, herbal notes, spice and pepper and they're darned good with summer BBQ!

"Strategery" for your Finances

I just love the (non)word, "strategery". It's one of Bush's little verbal flub ups, and it makes me smile. So today I'm writing about how to apply "stratee-gery", or wisdom from basic business planning, to your financial health.

Financial strategic planning is a lot like flossing: we all need to do it; we know we need to do it; and yet quite often, we don't. There are lawns to be mowed, wines to try, high shelves that need dusting -- you name it! Any excuse to get out of strategic planning.

The inherent problem with operating sans financial strategy is that you're much less likely to reach your goals if you don't set them! Ignoring your finances, counting on being lucky or thinking that it will get done in the future isn't strategy, it's excuse making. So pick a day sometime before the end of the month (which means you have 8 more from which to choose if you don't do it today), to answer the sets of questions below:

1. Where am I now? What are my investments? Where do they live? How much debt do I have? Am I paying it down faster than I'm racking it up? What are my spending patterns and where do I waste money?

2. Where do I want to be? In one, five, 10, 20 and 30 years from now, how do I want to answer the above questions? Do I have any other financial goals such as buying a house or car?

3. How am I going to get there? What do I need from my work/ career? Investments? Lifestyle? What is going to allow me to pay down debt and save more? Do I need a different job, position within my company or more education? What are my options?

Now that you've created some input information for the financial strategy session, it's time to create an actionable plan. According to David Collis and Michael Rukstad, co-authors of “Can You Say What Your Strategy Is?” in the April 2008 issue of Harvard Business Review, a strategy is comprised of three primary elements: 1) objective; 2) scope; and 3) advantage.

Objective is basically the answers to the questions in set two, or your overall set of goals. Scope is what you're going to do -- specifically, the answers to question section three. And advantage ties them all together -- it's the determination (you're already somewhat there if you're doing the exercise right now), perseverance, and energy you devote to achieving your goals.

In treating your financial health like a nurtured and planned business, you are much better position to succeed. And hopefully, you're approaching it in a more business-like manner, checking your emotional baggage at the door!

Stay the Course! Running Wisdom Applied to Investing for Retirement

In the great words of my high school cross country coach, "Just stay the course!" Whether we'd tired on a long summer run, or stayed up too late studying the night before a big race, his encouragement was always the same. The expression is both strong and beautiful: the strength is derived from all of the prior training; the beauty lies in its simplicity. Coach Boder was teaching us that the present, relatively minor challenges were no match for the combined efforts of a solid plan created in the past, and that fretting about it, or looking for a magic bullet fix, would only further drain us.

I think "stay the course" is most excellent advice for LMF4HMW readers with regards to their retirement portfolio investment strategies. The majority of you have many years before you reach retirement, and even those who are nearing the work force finish line will likely live another 20 years. (The average life expectancy for a woman born today in the U.S. is nearly 81 years; those of you who have made it to 65, a typicaly retirement age, are still likely to live another 20 years as you've gained strength over the years from jumping over a lot of life's hurdles.)

Why is 20 years so important? Jeremy Siegel of Wharton, in his book Stocks for the Long Run, points out that in 20 year rolling periods since 1926, stocks have beaten bonds and cash by a wide margin 98% of the time. This doesn't mean the waves aren't bigger; just that there is are 98 out of 100 reasons to set your asset allocation (division between stocks, bonds and cash) to a diversified collection (large and small; domestic and international) of stocks or mutual funds within your 401(k) and let it work for you, deriving strength from the method, and tuning out the noise.

For those runners or athletes out there, if you read research stating that those who took a day off per week were 98% more likely to beat those who trained daily, what would you do?!! If you were enjoying a day off and a taunting competitor called to tell you that there was a 2% chance he'd beat you given his daily runs, would you scramble out the door, or rest assured that you made a decision based on strength of prior research and are sticking to it?

There are two main challenges to adopting a "stay the course" mentality as far as retirement investment advice is concerned. The primary problem is noise -- currently, there is a vast amount of media attention dedicated to telling you that bad times are afloat, or worse yet, that they're already here. And implying that you should do something!!! It is very tempting to run scared in the other direction -- i.e., hide in the cash or bond corner or make a hasty reactive decision, with the doom and gloom mentality constantly bombarding you. (The fact that GDP -- gross domestic product and the primary measure of economic performance by many, grew in the first quarter of 2008 is somehow forgotten and ignored daily in favor of more important "news".)

Read the following sentence very carefully, twice: Even if we are headed for the dreaded downturn (that is, by the way, a normal part of the economic cycle, so we will eventually be there), the advice is remains the same: stay the course.

Why you ask? Because reactionary investing is not the answer. When planning for retirement, you set the training regimen ahead of time, not as you run along through the years. Runners don't randomly zig zag all over the city while training; they plan a course beforehand. And so should LMF4HMW readers when dealing with retirement.

Good runners accept that every day is not a best run; in fact, some are terrible -- we used to call them "crisis pace days" or "blow torch days". Instead of fighting them, we'd simply accept them, knowing that the path to increased speed isn't linear, and run through them despite the pain. Honed training involves managing the peaks and valleys of your athletic system -- accepting that you aren't going to be in the best shape for every race and choosing your wins based on the research and odds before you take to the course.

Just as a runner can use physiological research to manage her regimen, an investor can draw strength from financial research to stay the course. If we accept that economic downturn, "crisis" and "blow torch' days are a normal part of the cycle of growth, then we can at least derive strength from knowing that they're coming and having a plan to get through them. (Maybe it's heading out for a jog instead of worrying about it? Getting a mani-pedi? Reading Siegel, again.)

This brings me to the second main challenge when adhering to a "stay the course" retirement portfolio regimen -- it's both boring and frustrating. Psychologically, we'd be much more comfortable seeing our running times decreasing every race and our retirement portfolio increasing every period, even thought we know deep down that this is totally unrealistic. It's a lot less sexy to approach the challenging times with a mindset that instead celebrates the number of minutes you've spent training (especially those in bad weather), or the number of shares you've bought. And very tempting to do something in search of the magic fix.

My advice to you is the same whether it be as your running or retirement planning coach: go ahead and accept that your training or portfolio is going to have peaks and valleys. Embrace them. Derive strength in staying the course.

To celebrate strength of staying the course, today I'm making a toast to 20 years of patience by recommending a favorite style of wine: 20 Year Tawny Port. This citrus flavored, nutty libation with a long finish is actually a blend of different wines that have been patiently aging for many, many years -- 20 is the average age of the wines. Give it a slight chill for a refreshing summertime dessert.

Wine Only - I Digress into the Bottle in Honor of Independence Day

I've decided to balance out last week's rather downer posting on directives with some fun in honor of July Fourth. As much as I love Jolly Old England with its bobbies, London cabs, Wimbeldon (go, Federer!) and quaint thatched roof houses, I'm so glad to be an American! England just doesn't compare food wise -- think spotted dick pudding (eew), nor is it known for great winemaking. And besides, the U.S.'s happy hour culture is much cooler than 4pm tea and biscuits.

To honor the brave soldiers and citizens who fought for our great country's Independence, I've picked some of my favorite value wines made right here in the good ole USofA:

Gruet Sparkling - I love this wine! It's a methode champenoise (ideal when shopping for sparkling outside of France) from New Mexico! Yep, New Mexico has a legit winery. And for less than $15, you'll enjoy its citrus and apple flavors and toasty finish.

Chateau St. Michelle Columbia Valley Dry Riesling - a delicious, light and zippy bottling from Washington! A lot of US wineries strike out with Riesling, but this one is the real deal and it's widely available (i.e., in your grocery store).

Three Thieves' Bandit Pinot Grigio - what could be more American than a fun wine in innovative packaging? It's a 1L of wine (that's about 33% more for your money) that comes in a Tetra Pak -- like a juice box, and delivers zesty citrus flavors. Perfect for picnicking.

Bonny Doon Vin Gris de Cigare - this blend of Rhone varieties -- think Syrah, Grenache, Mourvedre, has a little Grenache Blanc added. It's a refreshing (drink chilled) mix of watermelon, strawberry and herbal notes and goes well with just about anything, especially when enjoyed outside!

A to Z Pinot Noir - an Oregonian wine with raspberry, violet and spicy notes. And it's not one of those fruit-bomby bottlings, either -- just good Pinot fabulousness.

Joel Gott Zinfandel - it's been said that "everything he touches turns to gold", so I'm thinking he must spend some serious time with his Zinfandel. It packs a big, but balanced punch with blueberry, plum and just the right amount of oak.

Raymond R Collection Merlot - I had to end with Merlot. I'm actually rather sick of all of the hoopla about Merlot being "in" or "out". The fact is, it's still the top selling red varietal in the U.S. (For those of you who don't know, in the movie, Sideways, Miles ends the movie drinking his prized wine that is in fact, Merlot-based. Wine geek irony given that he spent the whole movie making fun of it.) This bottling from Raymond has a good deal of raspberry, cherry and earthy notes, and will be excellent with what ever slice of meat you throw on the grill!

It's wonderful to be an American! As you enjoy these wines, I urge you to remember all of the good our country has done around the world, be thankful for our freedom, and re-discover or affirm your pride in this great nation. (It can be difficult when there's a tendency to self-hate and focus on the negative in the mainstream media.) So thank a soldier. Pick up a U.S. history book. Fly a flag outside your door. Sing the national anthem with heart -- that means with your hat off and your hand over your heart.

Or move to England and eat spotted dick with the Queen.

Make it Your Objective to Get a Directive!

Because this post has a somber tone, I'm recommending a wine pairing beforehand: open a nice, chilled dry rosé in honor of the summer! Think cheerful watermelon and strawberry flavors and pair it with some Parmesan or olives. Yum!

Before I get into the somber stuff, I have to make a few side points regarding pink wine. It's always annoying to me how folks in the wine industry are perplexed that "the people" are hesitant to drink rosé. We've been making fun of White Zin drinkers for years, yet expect wine consumers to love dry rosé? As if normal people have time to distinguish between cool and uncool pink wines!!!

So I'm putting a stop to this stupid debate. In general, drink what you like! If you like rosé, super. And if you like White Zin, more power to you -- know that your people actually saved Zinfandel plannings back in the day. Before Sutter home invented White Zin, California producers were ripping Zinfandel vines out! (White Zin is made from the usual red Zin grapes -- the skin is removed after a short time; hence the pink color, and sugar is added; hence the wine snobs making fun of you).

Ok, onto my blog post. I went to a new doctor this morning to discuss my ridiculously bad allergies -- think very puffy red eyes, frequent attacks of eye pain (where closing them and keeping them open is awful), sore throat and uncontrollable sneezing. I was impressed as he went through a comprehensive set of questions regarding my physical and mental health and illness history in addition to my current set of woes. When he asked if I had a living well, I felt pretty good about being able to answer yes. (And I was super impressed when he asked to have a copy for their files.)

After the Schiavo case that had all of the media attention in 2005 (I guess there was no "depression" or "recession" looming that spring), I made it a priority to get a living will. I knew that I would not want to be kept on life support in the event of an "incurable and irreversible condition that will result in my death" or "persistent vegetative state". And that I certainly wouldn't want my family fighting over it! So I went onto Legalzoom, and 15 minutes and $40 later, I had a living will en route in the mail. When it arrived, I had three required witnesses sign it (sort of an awkward thing to ask your co-workers, but hopefully they're over it), got it notarized, informed my then boyfriend and family, and then filed it away until today.

I've had several life changes since I wrote it -- namely moving and getting married, so I realized that I need to update it. And get a last will. As easy as it would be to "do it later" or wait until I have a bigger nest egg, the reality is that as a LMF4HMW, I owe it to myself and my family to get this done ASAP. It's relatively cheap and painless, and saves a lot of heartache and tax payer money in the long run. (I recently heard a story about a 39- year old man who died in a car accident and how his estate is being tragically held up in the court system since he didn't have the proper directives in place. His wife, in the middle of this nightmare, has to battle with court appointed lawyers over what he "would have wanted". Not cool.)

While I usually write about saving money, today's post is about spending money on something very, very important. Take the time to get living and last wills so that your wishes are properly executed. If not for yourself, do it for your family and friends, whom I'd personally rather have enjoying a helluva wine and celebrating my life when I kick the can; definitely not arguing in court or with each other!

Risk: The Surprising Reason You Should Make it Your BFF

You'd think it would be difficult for someone who was raised by a safety queen to to embrace and even enjoy thinking about financial risk. I burst into a big grin when I think back to my childhood lessons regarding risk-taking, which were mostly about "not doing (this or that)" due to the fact that I'd be "liable to die" if I did. These lessons were generally being taught when I was doing something I wasn't supposed to, like driving too fast, opening the door to strangers or not making straight A's. But I do -- I love the concept of risk and reward when it comes to investing, and I encourage you to befriend it!

Who in her right mind would want to befriend risk? Isn't financial risk "bad" -- best reserved for greedy corporate types, the frivolous, and gluttons for punishment? It's no surprise that when people hear the word "risk" in conjunction with investing, they often look like they've just sucked on a lemon! It's a natural psychological reaction to something we perceive as negative, but it's not necessarily the right reaction.

Let's pause for a crucial question: Are all risks created equal? The standard (non-financial) definition of risk usually implies a negative connotation -- something along the lines of "exposure to injury or loss". If you're a visual worst-case-scenario type like me, perhaps you are picturing a guy gambling away his retirement fund in Vegas? Or a daredevil skier heading down a sheer cliff? Someone else might simply think of a college grad moving to a new city for job opportunities, or a wife trying a new recipe for dinner. All of these are risks, but they certainly don't carry the same "exposure to injury or loss".

Just as there are varying levels of risk in the real world, there are different types of risk in the financial arena. For example, there's unsystematic versus systematic (industry or company specific versus general or market), liquidity, price, sovereign, and on and on and on. And they do not possess equal exposure to loss.

The good news is the LMF4HMW readers need not worry about the many different kinds of financial risk. The two biggest risks you face are 1) not investing at all or putting off retirement planning; and 2) being too conservative and losing out on market returns. Yes! I need not comment on the first given all my posts about investing now. Regarding the second, the all too common way a retirement portfolio asset allocation is presented and encouraged is as follows: you should hold 100% stocks minus your age to equal the amount of bonds. So if I'm 30, I hold 70% stocks and 30% bonds.

The problem with this approach, other than its inherent laziness, is that it ignores basic factual evidence! In Stocks for the Long Run, Jeremy Siegel, esteemed Wharton professor, educates us that "over the last century, accumulation in stocks have always outperformed other financial assets for the patient investor", or someone with a time horizon of 17 plus years (you unless you plan to expire -- not retire, in less than 17 years).

Given that Siegel's research demonstrates that stocks outperform bonds 90 percent of the time for 20-year holding periods and nearly 100 percent of the time for 30-year time frames, most LHF4HMW readers should concentrate their retirement portfolios exclusively in stocks. While your ride might be a bit more interesting and shaky a times (more up and down), the destination will be superior (better returns or more money).

The idea that stocks are inherently risky is based on misinformation and hype. Think Enron or any other financial crisis. While it's true that an individual stock's value can decline or even evaporate, when you hold a number of different stocks, you mitigate the risk via diversification. Most of you invest in funds via your company's retirement plan, so the diversification part is already covered. (Note: I do not advocate that LMF4HMW should hold individual stocks; for most people, index funds with their low expense ratios are the first choice and mutual funds are the second.)

With regards to bonds (or fixed income), Siegel cautions that it's very common to confuse "fixed income" with "fixed purchasing power". Bonds are not "safer" than stocks; in fact, in 20-year periods, they've lagged inflation at times by as much as three percent. And cash, well, if you put your retirement money in a savings account versus a diverse basket of equities, you can be sure that your nest egg will erode over time, which is really risky.

So I'll gladly swallow the "risk" of investing in stocks for my retirement. In this case, risk is indeed my best friend as it's what will lead to the reward of superior returns!

Now that you've made it through this posting on risk, open a bottle that is void of risk: a yummy Sauvignon Blanc from New Zealand closed with a screw top. Try Kim Craword, Huia or Brancott for some lemon/lime, floral and racy flavors from the Kiwis! (If you're wondering why screw topped Sauv Blanc pairs with today's post, it's because this type of closure eliminates the risk of the wine being "corked", or smelling like sweaty socks :)

Asset Class Primer - Breakdown of Major Types of Investments

When you think of assets, you may first think of your fixed possessions, like your home or condo, car or other valuable items. Or hey, maybe you're thinking about your runner's legs or squat-rack sculpted tush! While all of these are important to LMF4HMW readers, there's another type of asset with which you should have familiarity: financial asset classes.

I know this topics sounds pretty boring, but today's post is actually quite zippy! So I've chosen a similar wine, Albarino, which will make asset classes slide right down. Albarino is primarily from Rias Baixas, Spain, and is a crisp, lemony, peachy and often has almond characteristics. Perfect for summer weather and seafood!

There are three primary forms of assets -- stocks, bonds and cash. Stocks, or "equities" as they're referred to in the financial world, represent fractional ownership in a publicly-traded corporation. A share of stock is a claim to the company's assets or earnings, and the number of shares represents the fraction of ownership.

Bonds, or "fixed income" debt investments, are basically I.O.U.s from a company or government that has borrowed money from an individual or institution. Over a set period of time, the borrower will pay a set interest rate, usually semi-annually, and return the amount invested, or "principal" at maturity). There are many different types of bonds -- have you ever heard of zeros (those that trade at a discount and return more than the sum invested), munis (local or state issuance that often have tax advantages), or junk bonds (riskier investments with higher potential return)?

A lot of people think of bonds as "safer" than stocks, but this isn't necessarily true. Risk is a bigger topic -- that of my next posting, and is determined given inputs and desired outputs like time horizon, goals, etc. Something that's often harder to keep straight is that bonds and interest rates have an inverse relationship: when interest rates or yields increase, the value of the existing bond held decreases. This is because newer issuances are offering higher interest rates and those holding lower interest-rate bonds are receiving less remuneration for lending money.

Finally, the third major asset class is cash. Good old, cold, hard cash, which in this case includes highly liquid (or easily cashed out of) money market instruments -- savings accounts, Treasury bills, certificates of deposit, etc.

Congratulations! You should now have a solid understanding of the three major asset classes. Next week's post will cover asset allocation.

Lost in a Freaky Financial Timewarp

Today I was taken back in time, to an era somewhere between the 50's and 70's. The experience was an odd mix of elements: time slowed to a crawl; there was little technology; and people seemed, well, less sophisticated. Those on the services side of the windows were chatty (with each other, mostly), while those of us waiting were largely silent. The room was filled with little Post-Its taped to the walls reading "No Food, No Drinks", and there was a larger sign that said, "Tell the guard if it's been 15 minutes past your scheduled appointment". There was a near void of color -- just a bizarre palette of moldy yellow walls, gray frayed carpeting and cheap burgundy chairs, all of which well represented the lack of energy in the place.

Want to guess where I might have been? On the set of the sequel to Napoleon Dynamite? (No, but close! There was someone in there who looked like Uncle Rio.) In line for visitation at a prison? (Nope, they have food in prisons.) The DMV? Ha! Almost, but worse.

The environment I describe is an official satellite office of the government agency that's supposedly overseeing your "retirement" funding, the Social Security Administration. Yep! Good ole Uncle Sam's "financial advisory" services. (I have proof since I snapped some photos while the guard wasn't looking!)

Why would the LMF4HMW blogger would be in the SSA in the first place, you ask??! And why am I ranting about it? Turns out that when you get married, the USG's gift to the blushing bride is the opportunity to wait in line at several agencies -- the USPS, the DMV, and the SSA, in order to use her married name.

It dawned on me during my last hour of the day spent in a line that even more frightening than the inefficiency we all encounter at these bureaus is the fact that this one, the SSA, is tasked with swiping a significant sum of money out of your paycheck to ensure that you're saving for retirement "responsibly". Yet the minute one of its customers walks into an office with 20 people waiting, two of the five service windows close. (It's lunchtime, you know.)

I don't know about you, but I don't want my financial advisory shutting down shop just because someone needs a sandwich. I'm not an activist type, so I won't use the rest of the post to encourage you to vote for small government candidates and anyone with a platform including privitizing the SSA. (If you don't think I'm right, you should book a field trip there before disagreeing with me. Hell, I had it good -- I live in a smaller city, nothing like the horror of a big city government office!) I will, however, remind you that you are in fact the person responsible for saving for your retirement. Even if you do one day receive what you've "put away" with the SSA (i.e., what they've taken without your right to refuse -- I believe some might call that stealing), it most certainly won't be enough.

This is actually good news because you are in control of the majority of your retirement savings via your investment accounts and 401(k) plan(s). You have choice as to in what to invest, how much to allocate, etc. And you can even do most of your financial and operational transactions online (without taking a number and listening to someone gripe about needing the money to pay rent)! So take some vows of your own on Monday -- to put away more, as much as you can, and if you haven't begun contributing, by all means, to do so! Otherwise, short of a trust fund, you'll be the woman crying at the counter to the SSA officer about needing money to pay her cable bill.

Wipe out Telemarketing Efforts!

Sick of flipping away from a great conversation only to find that the person on call waiting is yet another telemarketer? These companies always call precisely when you're least inclined to listen -- just as you're about to open that special bottle for a dinner, or when you've finally dozed for a rare nap. I don't know one HMW who is interested in these unsolicited and bothersome interruptions, and thankfully, they're easy to stop!

Simply register your telephone number(s) online at the National "Do Not Call" Registry or call 1-888-382-1222. If you continue receiving calls, you can file a complaint. Or, I find that a firm reminder that "I'm on the 'Do Not Call Registry'" does the trick.

Credit card offers are another noxious pet peeve. They're endless, a waste of paper, and in many ways, they're worse than telemarketing calls: some HMW fall prey, figuring they might as well sign up "just in case", or worse yet, they're stuck in a cycle of transferring balances from card to card in search of a "better" rate (versus addressing the root of the problem which is too much credit card debt and no real plan to conquer it).

Just as you can opt out of telemarketing calls, you are henceforth empowered to end the credit card offers! Simply fill out this online form, making sure to choose "opt out" -- it defaults to "opt in" (sneaky, but not sneaky enough for a HMW). This will free you of credit card offers for five years, a rather good deal considering it takes about 50 seconds.

Now go out and celebrate with a nice box o' Chardonnay! Yes, you heard me right. I was recently judging at a wine competition and had the pleasure of trying a Black Box Chardonnay from a well, box. It's a slim cardboard package with a tetra-pack (think of a bladder in a Camelback) filled with four bottles of wine. It stays fresh weeks after opening (as if wine ever lasts weeks at my house). And for the environmentally inclined, produces less waste. Best of all, it's $20 for four bottles! Every night can't be a Burgundy night!

The B Word

You likely have to deal with the B word at work. Those of you in the for profit world are quite used to cutting, measuring and arguing for them at least annually. And those of you in the non-profit world are likely blaming Bush or some other "mean" Republican because you had "cuts" and will therefore, like every other business, have to pick your priorities.

Figured it out yet? Today's post is about BUDGETING! Are you pumped yet? I'd guess that somewhere around 80 to 90% of LMF4HMW readers don't have one. (And that's probably a conservative guess.)

Would you run a business without a budget? Of course not, that would be irresponsible! Then is there even one good reason to run your life without one? (Unacceptable excuses: "I don't feel like it." "I hate money talk/numbers/finance." "I'm suddenly coming down with the flu.")

I'm not suggesting that you spend an hour creating a budget, but I am pleading with you to give it 20 minutes of your time. Hell, you're the one producing the revenue. You should at least know where it's going! This can be done in a few simple steps:

1. Write down your monthly cash inflow --"revenue" from your job(s), etc. (Assuming this is net or after you've paid taxes, contributed to your 401k, etc.)

2. Write down your fixed monthly expenses -- rent/mortgage, car payment, school or other loans, car and renter's/homeowner's insurance and dues, utilities, etc.

3. Make a list of your other monthly cash outflows -- gym membership, cell phone, gas, groceries, maid services, beauty appointments, credit card payments, etc. (Being online with a recent bank account statement is helpful at this point.)

4. Record any other outflows you've forgotten -- think hard! There's always more. Restaurants/bars, trips, gifts, investments, etc. These are obviously dynamic expenses but a good estimate is better than nothing.

5. Add outflows from #s 2-5 to get your total monthly cash outflow.

6. Subtract your total monthly outflow from your inflow.

If you have a positive number, congrats! (You're still not done, but you can go open a bottle of Syrah -- I had an awesome one from Melville last night.) If you are staring at a negative number, the good news is that you're about to take your first step in turning this into a positive one. The reality (not calling it "bad news" because whining about it doesn't help) though, is that you have to make some hard changes. NOW.

The easiest place to start is the items you recorded in #4. I love dining out, but it's a very fast way to lose $100! (Your thing might be shopping or an expensive activity.) If you've cut all of that or you didn't have anything there to cut, move to #3. Do you really need two gym memberships? Maid service? Two facials a month? Get the final #6 positive.

The point is, you need to determine how much you can spend and stick to it. Everyone's number will be different. It's all about prioritizing.

In taking control of the situation, you gain power. (And likely better shut eye.)

PS - Be sure to revisit this at least annually -- a good time is when you have your work review and hopefully get a raise. Put it on your calendar. You owe it to yourself. Being in control of your pursestrings is hot!

Feelin' Shaky? Then Lay Off the Media and the Caffeine!

William Bernstein, financial theorist and author of The Four Pillars of Investing, said it best in a CNN Money website article, "Calming Words for Troubled Times":

"Get out of the market? Of course not, silly. If you think about it logically, you are rewarded for owning stocks precisely because they are risky; the dicier things look, the more money you can expect to make in the long run...History bears this out: The lowest returns were earned by buying high when there was a lot of blue sky - think 1928, 1969, 1999. And the best returns were earned by buying low in 1932, 1942 and 1982, when it looked like the whole world was going to hell. One more thing: Stop watching CNBC. It will make you stupid and poor. If you must watch, turn off the sound. It becomes an excellent substitute for Animal Planet."

A LMF4HMW reader surely doesn't lose the irony between his "calming words" and the title of the piece still promoting the idea of "troubled times". The main point of my article today is to calm your fears. The sky is not falling. We do not need more government intervention. And volatile markets are normal.

Let's face it -- the sensationalism addicted media is bored right now. Calm, positive news just doesn't sell stories. We've had to put up with political coverage for the 2008 election since about 2006, so even the talking heads are getting sick of it. There is some success in Iraq given the troop surge (although you won't hear much about it given the agenda), and there haven't been any lacrosse "scandals" (the real scandal was the media's biased treatment of the issue) of late. So when you've got to sell ad space -- i.e.: FREAK OUT about something, it might as well be the economy!

In one of my first posts, I talked about putting together a long-term financial plan. Successful investing is not about derailing your efforts because you heard some bad news or have an icky "feeling". Just as a rock hard body is crafted by shunning impromptu scoops of Rocky Road in favor of your training plan, a strong portfolio is made by adhering to your strategy.

So instead of being glued to the tube or "news"paper in awe of all the ills of the financial markets, take some advice from mother, who always knows best: "Turn off that television! Go play outside!"

A Letter to my Econ Prof. Just in Time for Tax Season

Dear Professor XYZ,

I have something I need to confess: I didn't really understand what you were talking about ten years ago when I sat in your Macroeconomics class and you said, "One dollar today is worth more than one dollar tomorrow." And worse yet, I didn't give a hoot about economics -- a friend told me you were a great prof, that it was good material, and that she'd help me (thanks, Liz!) so I signed up.

Of course, now I wish I'd been able to fully grasp the course content. I tried -- you had a photographic memory and would've noticed if I'd skipped class even one class. I studied hard, too. I think I received a B (you'd surely remember), but the material just didn't completely click. The main problem was that I had no real world experience with which to compare the concepts you presented. So I had to go and spend $40k to get an MBA with a finance concentration and literally force feed finance into my brain.

Now that I know more, I really appreciate what you were trying to do. All those graphs and charts with supply and demand make sense now; I get it! The only problem is, most people walking around (and voting... grr) don't, but I digress.

Please find below my blog on Time Value of Money, which is dedicated to you. (Just sorry I can't remember your name, especially since I know you'd remember mine.)

Yours,
LMF4HMW blogger

***********************
Perhaps you've heard it to: "One dollar today is worth more than a dollar tomorrow." OK, sounds reasonable -- I'd rather have a buck today than tomorrow. I'd rather get paid today than tomorrow. (I'd rather buy the Brunello today... oops, not really, that would put me in the hole $100 :) Do you really understand the concept? And more importantly, why you should care?

The concept, Time Value of Money, is a basic premise of modern finance. In asserting that today's dollar is worth more than tomorrow's, we're making a valid estimate that by having the money today, we could accrue interest until tomorrow, next year, etc. It is an important concept because it affects the way you operate financially. We all know we want to pay lower interest rates on loans, and that we'd prefer a savings account or investment with a higher interest rate. This is also due to Time Value of Money.

In honor of tax season, let's examine a hypothetical duo of Janes and their differing approaches to paying taxes as an example:

Note: Jane is a single woman.

Jane Doe - like many of us, she wrote "1" (self) on her withholding form some time ago. She received a $2000 tax refund and is happy about it! Thrilled, actually, as Ms. Doe figures she would've "spent it anyway" and is glad to use it to pay down $1500 in credit card debt and treat herself with the rest.

Jane Duh - Ms. Duh set her exemptions appropriately when she started her job a few years back and knows she'll need to adjust them when she buys a condo in the next few months given the mortgage interest rate deduction. She's only expecting a minimal refund check, and is also thrilled.

Which Jane should be feeling thrilled right now? Hint: "Ms. Duh" ain't no dummy.

Confused? What's wrong with getting a fat refund?!! It's like finding $20 in your pocket, but better, right? NO. Why? Time Value of Money: Ms. Doe unknowingly gave Uncle Sam a $2000 interest-free loan in 2007. If she'd invested it like Ms. Duh in a money market account offering 5% interest, she'd have $2100 right now. The object of the game is not to overpay.

Note that it's unrealistic to assume that you'll net out at zero. Ms. Duh's "perfect score" of owing nothing and receiving nothing is for illustrative purposes only. What's important is that you examine your withholdings to get them to the point where you will either receive a minimal refund or even owe Uncle Sam a few bucks. Better him giving you an interest-free loan, right?

PS - what goes better than milk with Uncle Sam cake? Prosecco! It's affordable, light, sparkles and can handle a bit of sweetness.

Index Funds! Love em!

As I wrote in my last post, index funds are my favorite thing finance. I just love em! Almost as much as I love newfer puppies!!! Why do I have such amorous feelings about something that's neither cute, nor fuzzy? Well, for one, index funds don't slobber. And two, they're relatively cheap (unlike $2000-$3000 newf pups).

Index funds are, in general, super investments. They are low cost mutual funds that track an index. What does this mean? Well, let's take my favorite, since today's post is all about faves: MSCI EAFE. This is an index created over 30 years ago by Morgan Stanley that provides broad international stock exposure -- it tracks major stocks in Europe, Australia and the Southeast Asia. (Remember, the US comprises less than 50% of the world's equities, so getting international exposure is crucial. Think BMW, Diageo, Loreal, Barclays, etc.)

Instead of having to buy a few shares of stock for each of these companies in the index, which would be incredibly time consuming and expensive, you buy the index. This means you're diversified at a lower cost. So you don't have to worry about trading or following the individual equities -- HMW are way too busy for this, and you don't pay high fees. Vanguard, I-shares,and other investment companies offer index funds that track EFA, and because there isn't a big research fee given that they're just buying the index, the cost savings is passed on to you in the form of a lower management fee. Expect to pay somewhere around 0.25% total expense ratio, which is a great deal considering that a lot of international funds charge over 1%! Each tenth of a percentage point you save in fees is therefore allowed to grow as the investment, which means more money in your pocket.

Look for index funds in your 401k -- companies are starting to offer them. And if they're not available, put in a call to your benefits department and request that they be added next time the plan is reviewed. If you have an IRA or taxable account, you'll be able to buy them there.

So that's it! Pretty quick post. Enjoy!

P.S.: The one "downside" to index funds is that you'll never beat the market. You'll just track it net of the (low) expense ratio. Know that the vast majority of folks don't ever beat the market, and in fact trail it given HMW sins like excessive trading, letting emotion dictate strategy, etc. I'd be very suspect of a broker or hot-shot who tries to steer you away from index funds! Unless of course it's Warren Buffett calling. In short, index funds are fabulous -- they're cheap, diverse and guaranteed to track the market. All you have to do is buy them!

Coming Back from "Vaca" with a Fee Rant

Well, it was sort of like a vaca -- in the last four weeks, I've managed to buy a house, form an LLC, and drive all night with two pets to my new (much more efficient and less expensive) home state of Washington!

I certainly don't want to offend all of my California-based friends, so I won't rant about the insane taxes there. Let's just say that forming an LLC will set you back $800 in the Golden State and run you $195 a couple of states north, and leave it at that. I'm already saving money, and you know how much that pleases a LMF4HMW! And yes, one of the major deciding factors in our move, other than my fiance's company so generously paying for all of our related expenses and packing, was the lifestyle change -- i.e., lower cost of living and opportunity to own a home. (More on that later -- those mortgage deductions are pretty fab.)

How does the above diatribe help other LMF4HMW readers? Well, it doesn't. It's a lame excuse for why I haven't written in a month :)

Let's get down to business. Today's post is all about fund fees. (These are the funds you pick in your 401k.) 401k fees are typically two-fold: 1) particular mutual fund's management fee or more generally, expense ratio; and 2) administrative fee for the plan. Unfortunately, there's not much you can do about the latter -- it's either take it and revel in the many benefits of a 401k (tax, growth, auto-pilot, etc.) or be very silly and not invest. Unless you're involved in the benefits department and can therefore rightly search for a lower cost plan for your company!

So we'll tackle the fee over which you do have some control, the expense ratio! The expense ratio is the percentage of money invested in the fund that goes to running it. Typical annual expenses include research, taxes, office costs, etc. and of course the monies paid to the fund manager (people in the business aren't prone to staying at Best Western and eating at Denny's). They typically range from a very low less than 0.25% for domestic index funds up to 2+% for emerging markets funds. Some funds market themselves as "low fee"; others as "high return" (usually higher fee). How they're contrived is not an exact science. (Sounding a bit like calculating the AMT, right?) Actually nowhere near as confusing, as again, you hold the reins here!

The fund manager's job is to make money. Your job is to choose an appropriate funds with relatively low expenses. While you'll only have a slightly greater chance of success calling the Vanguard or Dodge and Cox manager and asking him to lower the fee than say, getting customer service from a cell phone company, you do have the option to choose which funds in which you invest. And fees are a major consideration! The more dough lost to fees, the less your money will grow.

So look at the fund's prospectus (it'll be online) and search through the several pages of "blah, blah, blah" until you see "total expense ratio". This is the metric with which to compare the funds up for grabs in your 401k. Note: some of them will have a whole host of other fees like 12b, etc. You focus on the TOTAL expense ratio.

Ideally, you want a fund that's beating its benchmark -- the index to which it compares itself, net of fees. This means that the return from investing in the fund is better than the benchmark index even considering the monies paid out for expenses. If none in the group do so, choose the closest options.

Do I seem like a stickler? I am! There's just no reason to invest in a fund that isn't beating its benchmark net of fees. Why? Because a lot of you are lucky enough to have index funds, my absolute favorite thing finance. And the topic of my next post!

P.S. - do not be surprised if none of the funds available beat their index benchmarks. One of my most interesting reads in a Portfolio Management class was a research article hypothesizing about whether it's 40, 70 or 90 percent of actively managed funds that do not! Let's just say the finding was on the high end and open a bottle of Chateau Neuf du Pape, a blend of up to 13 different grapes that hails from the Southern Rhone in France, in honor of this weekend's Rhone Ranger's festival in San Francisco!

AMT - The Assinine Mother of all Taxes

In the great words of my high school cross country coach, "I'm so mad I could fry eggs on my head!!!" Why such "negative karmic energy" on a sunny Monday? The Alternative Minimum Tax, one of the most egregious problems with the US Tax Code.

Interestingly, a look on Investopedia, normally one of my preferred finance sites, only tells you that AMT is a "tax calculation that adds certain tax preference items back into adjusted gross income... designed to prevent taxpayers from escaping their fair share of tax liability by using certain tax breaks." Hmm, that's pretty benign for a tax that was enacted in 1970 that has NEVER been indexed for inflation nor tax cuts!!! Live in San Francisco, Los Angeles, New York or any other ridiculously expensive city? Doesn't matter. We all know $75,000 is San Francisco is much different than $75,000 in Topeka, but the lawmakers just can find the time between MLB steroid investigations, holding babies, and flying around in their not-so-carbon-neutral jets (emulating Al Gore) encouraging everyone to vote for "change" (them).

I digress. The AMT is a separate tax code that was created to prevent tax payers from escaping their "fair share" (note: I get really prickly anytime the words "government" and "fair" are in the same sentence) by disallowing the majority of deductions. It is, quite literally, an alternative set of rules for the minimum amount you'll be paying the federal government. When it was enacted some forty years ago, it affected 19,000 people. Now millions are paying it. If you normally owe $47,000 and your AMT calculates to $57,000, you'll pay the $47,000 plus the additional $10,000.

The rates vary between 26-28% as opposed to the regular 10-35%. The main issue is that most deductions are lost under the AMT, including property tax, state and local taxes (enormous in states like CA and NY), unreimbursed business expenses, etc. (You do "get" to keep mortgage interest and charitable deductions, but this doesn't help those of us living in areas where you need $800k for a 1200 square foot flat with no parking.)

Confused yet? Don't feel bad -- I can't help you with the sick feeling, but I can tell you you're not alone: most politicians couldn't explain it to you either (shocker). Another big issue is how complicated it is for you, me, and your accountant. There's no magic number to say, "sorry, you're getting screwed by AMT this year," only "triggers" like having dependents, deductions, etc. With $75,000 income, you begin to be a prime target. And if you're married making $100,000 together (really not that hard to do, especially in bigger cities), you're definitely getting screwed. Since I'm tying the knot in May, I'll be paying even more AMT -- funny, I didn't put that on my registry?!!

If you'd like to read more, here's an informative article... I just threw up in my mouth so I need to stop soon.

On a brighter note, here are some things you can do to better your situation:
1. Contribute the max $15,500 ($20,000 if you're over 50) to your 401k as it minimizes your taxable income.

2. Be sure to write off any charitable donations. Tell your accountant to give you an estimate of your AMT and perhaps choose to donate more to avoid being hit.

3. Consider buying property versus renting. While this isn't for everyone, it does help.

4. Ask you boss for a huge raise! If you make over $500,000 single or married, you're no longer subject to AMT.

5. If you're the political type, consider writing your Congressmen and Senators and encouraging them to reform AMT or better yet, ditch it all together and get on the Steve Forbes flat tax wagon. (I'm in SF and I'm pretty sure Nancy Pelosi, Barbara Boxer and Diane Feintstein -- my three least favorite women, have blocked my mail. Another shocker: given their situations/ incomes, none of these b*tches pay the AMT.)