Wine Tasting and Your 401(k)
July 29, 2011Yesterday was a great day. I spent the day with my girlfriend Julie, doing some wine-tasting along the Finger Lakes Wine Trail in upstate New York. This area is known for wineries dotted along the lakes, where you can spend the day traveling along, checking out what each has to offer. The wineries range from quaint and home-spun, to modern and spacious. There’s one thing, though, that you can always count on, no matter which winery you visit. Every winery will sell their vintage of the faithful, quality wines such as Merlot, Chardonnay, or Riesling. You can rest assured that if you are purchasing a bottle of Riesling, you will get a wine that is made from Riesling grapes, and upstate NY is known as a great Riesling producer. I agree! Now, maybe that Riesling tastes more like lemonade, but you won’t be too surprised overall. The prices of these reliably good wines are usually on the higher end of the scale, since you are paying for the quality of the grape that makes the wine. These grapes, such as Riesling and Merlot, are popular for a reason: they are quality. They are dependable.
Along with the standards, you can also try their boutique, flowery-named, artsy-labeled signature wines. These are fun! They have names like “Scandalicious!” labeled with cartoon legs in fishnet stockings kicking high heels, almost daring you to try her and be “scandalized” by her frisky feet! And, as Julie’s son will tell you, they draw crowds of curious tasters. He is a biology major who can tell you everything about the wine making business, from planting the crops through the bottling process, and his summers are spent working at a winery pouring such a wine! These wines are usually a little cheaper, since they’re made from blends of grapes, some not-so-famous varieties that may not be good enough quality to stand on their own. The risk of buying this type of wine is that, unfamiliar grapes and wines may not keep as well, and tend to change unpredictably as they age. (Sounds like one of my uncles!) So, the question is, is the price worth the risk? Sometimes, making the choice between the “standards” and the “adventurous” can be a challenge, especially when you might not have unlimited budget dollars to spend on your pleasures. Decisions, decisions!
That’s applicable not only to wines, but to financial issues as well. When I get questions from people about how to allocate their 401(k) plan investments, I see the same struggle. Risk can be a good thing, and we can all get drawn in by the lure of big investment returns, especially when people around you are talking about how well their accounts have performed. Here’s a thought when you are considering reconfiguring your investments.
Pretend you’re a wine taster. Ask yourself these questions: “Is the promise (taking on more risk equaling higher returns) more exciting than the reality (higher losses in a down market)? Is this a product with nice packaging (the thought of high returns to help you retire earlier) but an unpredictable long term quality? How much can I afford to lose if this product doesn’t age like the more dependable ones?”
I have noticed a trend lately with people I have had the opportunity to meet with to discuss their retirement picture. They are getting more aggressive in their 401(k) plans; some of them are going from very conservative to very aggressive. They (and all of us, really) got a little bit beaten up by the stock and bond market in 2008, and reallocated to a more conservative investment mix. With 2009 and 2010 being positive years for stocks, the Dow is getting back to pre-financial crisis territory and I have seen people taking on more risk. Is this the right time for that? I don’t know. I’m a fan of maintaining a consistent approach, not changing my investment philosophy because of what is going on in the various markets, and rebalancing my accounts on a regularly scheduled basis. I definitely have a methodical, Pinot Noir or Riesling approach rather than a “Scandalicious” approach. What I would like to see these people do is take an honest look at their goals. Start there. Understand that if your goals require more risk, then it may be appropriate to move from a conservative to an aggressive position. If your goals require less risk, why take on more volatility and the chance that you can move further away from your goals if you don’t need to? Let your goals be your guide. That’s where talking with a financial professional can help put things in perspective.
Risk can be profitable. Sometimes the new wine blend or grape becomes the next classic. Only you know how much you want to risk, why, and how your longer term goals might be impacted. Just keep your eyes wide open when a “Scandalicious” opportunity walks your way. As for me, I think a chilled glass of Riesling sounds good right now!