Women, Wisdom & Wealth: Flexibilty is an asset too!

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”

Aristotle

“Greed is good” is a classic line from the film “Wall Street.” This gem is delivered by Michael Douglas as he portrays Gordon Gecko, the evil villain from the 1987 movie.

In case you haven’t heard, there’s a sequel out titled “Wall Street: Money Never Sleeps” which was released in January. Since this isn’t a movie review column, let’s suffice it to say that Gordon is getting out of prison after a very long stay and the question is “can Gordon be rehabilitated?

These two movies remind me of the old adage, there are three types of animals on Wall Street; bulls, bears and pigs. Bulls make money, bears make money and pigs get slaughtered. The financial industry has undergone many changes over the past 18 months. But the most critical phase of change is taking place right now in Washington as the debate about America’s financial regulatory system takes center stage. Stay tuned.

Individuals who develop sound financial planning habits are well positioned to tackle life’s bigger questions. By clarifying and quantifying your ambitions you potentially increase the likelihood of reaching the mark. Take a few minutes to identify your lifetime goals and estimate the cost and timeframe for accomplishing those goals.

Divergent ideas

Ideas about how to achieve personal fulfillment — and what it is — will almost certainly change for each of us over a lifetime.

As individuals we are caught up in the day-to-day details of managing careers and family. Check in with your family and discuss how they see the future. You may be in for a surprise! Many, many years ago Pete and I seriously discussed purchasing a dive shop on the east coast of Florida. We scoured through the businesses financial documents, spent time in the shop with the owners and were ready to make the offer. In my mind I saw everything in our world staying relatively the same; we’d hire someone to manage the store on weekdays and Pete would take long weekends to work in the shop and go out on the dive boat. Wrong! Pete assumed we would be moving and running the shop ourselves. This is an extreme example of divergent ideas, but you get the point. The range of retirement lifestyle options has grown and will continue to do so. It’s worthwhile to have a discussion with your partner to identify and appreciate the changes taking place with each other’s goals and aspirations.

Last week we reviewed budgeting and cash flow analysis to help you identify your retirement income sources. Today we’re discussing the different phases. Planning for life is inexact, so maintaining a flexible attitude is helpful. There are some basic concepts that can make that possible. Try to reconcile wildly divergent dreams. If your partner announces a desire to join the Peace Corps, take a deep breath and do some research rather than immediately rejecting the idea. You and your partner will likely find that many of your interests can be satisfied. Bring a sense of humor to the planning table and you may find you’re able to combine even the most unlikely retirement dreams.

A completely different phase of life is when we are saving for your child’s education, and he or she has just two or three years to go before the first year’s expenses are due, it may be tempting to opt for the highest return you believe is possible. Watch out, financial markets are unpredictable, and investing aggressively could ruin your plan. Let the current volatile market be a cautionary tale. Think of what likely happened to the finances of anyone who invested college fund money aggressively on Oct. 9, 2007, with the market at its all-time high of 14164.53. That money may be worth 20 percent less today.

The unexciting fact is that if you have a short-term financial goal, the money you save should probably be in safe, principal-preserving high-yield savings accounts or certificates of deposit. When you began investing, you established your portfolio with a mix of equities, fixed income investments and cash allocated to match your financial goals and suit your risk tolerance level. It would be convenient if you had to do no more, but it doesn’t work that way. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

In time, some elements of your portfolio gain while others fall back. Your 60/30/10 allocation for equity/fixed income/cash can easily become a 77/16/7 allocation. Now equities, which are riskier, constitute a higher percentage of your portfolio. Such changes occur because investments don’t all move in the same direction at once. Good years for equities, for example, allow that portion of your portfolio to grow faster than the others.

Time to rebalance

There is only one way to restore your portfolio’s original balance — buy and sell investments until you re-establish the original mix. You may also want to examine your goals and determine whether your original allocation still serves them. Once you decide, you could sell some equity positions and reinvest the proceeds in the fixed income portion to restore the original balance. However, you will probably trigger capital gains taxes on your sales.

Reasonable rebalancing

How often should you rebalance? Once a year, or at least every 18 months, seems sensible. The key is doing it regularly, as you would any other maintenance activity like changing the oil in your car or rotating the tires. Keep in mind there is no need to panic over a slightly out-of-whack portfolio.

Just like checking in with your partner to discuss your life goals, it’s very important to review your portfolio on a regular basis. At one point in Wall Street: Money Never Sleeps, Gordon is told “Mr. Gecko, no matter how much money you make, you’ll never be rich” ... don’t overlook the intangible treasures: integrity, community, honor, authenticity, and peace of mind. Invest accordingly.

This article provided by Darcie Guerin, Financial Advisor & Branch Manager of Raymond James & Associates, Inc. 606 Bald Eagle Dr. Suite 401, Marco Island, and FL 34145. Gulfshore Life Magazine named Darcie as one of the Best Personal Wealth Managers in The Southwest Florida Area for 2009 and 2010. She may be reached at (239)389-1041, email Darcie.Guerin@RaymondJames.com or visit RaymondJames.com/Darcie.