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.