The Recipe for Bourbon and Investing
What does bourbon have in common with investing? If the thought of dealing with your investment accounts makes you want to drink whiskey, I don’t blame you. I would argue however, that it’s because you’ve never had it explained before in such a spirited way. Did you know there are certain requirements for bourbon to be called bourbon? In the same way, there are certain requirements for your investments.
Bourbon and investments must be aged. They both take time. And the longer you wait, the sweeter your reward will be. According to the Federal Standards of Identified Distilled Spirits, to be considered bourbon, whiskey has to be aged in charred oak barrels for a minimum of two years. Think of your 401(k) and IRA like a charred oak barrel that your money goes in that you don’t touch until it’s ready.
Similar to the minimum time requirements for bourbon making, if you put money in an IRA account it has to be in there until you’ve aged to 70 and a half. You can take it out before the time limit, but you’ll pay a price in penalty charges! On your half birthday of your 70th year, you are required by law to make withdraws from a Roth IRA. For your employer managed 401(k), most plans require you to be 55 before accessing your funds without incurring a penalty charge. To make things more complex, if you have a Traditional IRA, the age you can make withdraws is 59 and a half.
All the different rules for aging your money in a variety of investment accounts, are enough to make your head spin. The bottom line is this: put your money into your accounts and don’t touch it until the time is up. Here’s a serious question: can you set calendar reminders 40+ years in the future? Bonus points for anyone who tries! I know, it’s difficult to part with your money for what seems so far away. Just remind yourself the next time you enjoy a glass of bourbon or wine with cheese; the best things in life require time.
Bourbon and investments must be allocated. Whiskey is made up of grain ingredients like, corn, barley, rye, and wheat; but bourbon has to be made of 51% corn to be called bourbon. Unlike bourbon, there is no requirement for how you allocate your investment accounts, only guidelines, but they must be allocated too.
If you haven’t had your mid-life crisis yet (in your twenties and thirties), I recommend a minimum allocation of 90% stocks. Think of stocks as the corn percentage in bourbon, it should be the base of your investment portfolio. The remaining 10% can be bonds, barley, or whatever you wish! Some people may argue it’s risky, but it’s actually not. The real risk is in being safe, because of dreaded inflation and taxes which destroy returns! Translation: the less you invest in stocks in exchange for bonds (which are safer), you decrease your earning potential. As you get older, it’s recommend that you adjust your allocations to a higher percentage of bonds and a lower percent of stocks, minimizing your risk as you get closer to needing the money in retirement. I strongly suggest working with a financial planner that will guide you in these decisions as you get older.
There are other requirements for making bourbon such as the proof, and other labeling and aging specifications. It’s really a fascinating and delightful process! One of the most important distinctions, in my opinion, is that only whiskey made in the USA can be called bourbon. This is where you don’t want to follow the recipe for bourbon on your investments! Diversifying your investment portfolio means you are investing in both stocks and bonds, but it also refers to the mix of money in domestic and international funds. You want your money invested globally, not just in your backyard.
So, your recipe for investing is: allocate, diversify, and age! The ingredients and amounts are up to you. It’s that simple. Cheers!