Friday, June 27, 2008

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!

Friday, June 13, 2008

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 :)

Friday, June 6, 2008

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.