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MC Stories – Why You Should Give Your Children the Desire to Learn About Finances

Studies suggest that parents may dread financial conversations with children almost as much as the conversation about “the birds and the bees.” A 2018 study conducted by T. Rowe Price reveals that two-thirds of parents show reluctance in discussing money with children. Parents may find that it is only important to begin discussing finances when there is an immediate concern, such as a health crisis or an economic downturn. However, that is not the case. A keystone to growing up is independence and part of that is financial independence. A recent study shows that 64% of adults believe that by 22 years old one should be financially independent of their parents; but, only 24% of 22-year-olds are actually financially independent.

So, how do we create financially mature and independent adults? Teach them young. In today’s world, money has moved to the ether of numbers on a screen and plastic cards. We rarely use cash for daily transactions and checkbooks (or balancing them, for that matter) are a thing of the past. In the eyes of a child, it is becoming increasingly difficult to tangibly understand the value of a dollar. Realistically, it is becoming difficult for all of us to understand the value of a dollar. We must re-wire the way we think about money and then translate that to the next generation.

Parents have a unique responsibility of molding children’s development – particularly around their financial education. The T. Rowe Price study revealed that what children learn from parents (as opposed to financial literacy courses) strongly informs their financial decisions later in life. Parents revealed that the topics they wished their own parents had discussed with them were credit and financing, insurance, basic life budgeting skills, and investing. Using that as a baseline, it is suggested that these conversations begin early and become a central part of your relationship with your family.

Establish age-appropriate conversations and activities for your children. Here are some suggested age-appropriate methods. For young kids, you can make it fun, while also teaching them basic math skills. For children 6-10, help them understand the value of a dollar by creating ways for them to earn money. Once earned, they can decide how to spend and save money. Forgo the piggy bank and help them open a bank account. The earlier the better, because this is the new way of life and it is important for children to understand not only the value of a piece of paper, but the numbers on a screen. For pre-teens, help them learn budgeting for expenses such as activities with friends and extra-curricular. Give them allowances and see if it lasts. Introduce compounding interest and the importance of investing early. For late teens, teach about credit and the importance of maintaining good credit scores throughout life.

In addition to regular conversations and supporting strong habits, there are numerous online resources available for children and parents (provided below). It’s ok to not be an expert when it comes to finances. It is more important to instill an eagerness to learn within your children. That willingness to learn and grow will develop into great money habits and forge the way to a successful financial plan for your family. And as always, if you do not feel you have all the answers, please reach out to your financial advisor or a trusted source for more information. We are always here to help you and your families.

 

Resources:

-FDIC’s Money Smart for Young People (includes activities and resources for parents of all ages) https://www.fdic.gov/consumers/consumer/moneysmart/young.html
-Credit Card Insider https://www.creditcardinsider.com/learn/
-Stock Market Game https://www.howthemarketworks.com/
-Payback – Game to teach about student loan debt https://www.timeforpayback.com/
-Practical Money Skills (games/age-appropriate discussions for children) http://www.practicalmoneyskills.com/learn/life_events/family_life/educating_your_children

MC Stories – Set it and Forget it

That sound you heard earlier in April, all across America, was the clattering of knives and letter-openers, dropped to the floor by retirement age investors staring at their quarter-end 401(k) statements. What had gone wrong with their “set it and forget it” investment plan?

The “set it and forget it” rhyming aphorism is one among of a bounty of rhymes that give our brains an easy path to perceived truth. These easy paths are known as heuristics, where one might take a shortcut to an answer — when time or interest or resources do not allow for a deeper dive. The first one we all learned was, “An apple a day keeps the doctor away”. Later, on the golf course we were told, “Drive for show, putt for dough”.

This tendency to view rhyming statements as more truthful is known as the Keats Heuristic, a term coined by two psychologists in a 1999 academic paper.* The term is drawn from Keats’ poem Ode on a Grecian Urn ,** wherein Keats concludes, “Beauty is truth, truth beauty,” — where a prettier image or prettier language is perceived to be truer. Academic studies have shown that where two phrases possess similar meanings, a rhyming one will be perceived as
carrying more truth:

“Woes unite foes” is an easier path to the brain than “Woes unite enemies”.

“What society conceals, alcohol reveals” trumps “What society conceals, alcohol unmasks”.

Obviously, this cognitive bias has not gone unnoticed by politicians and corporate marketers. General Eisenhower’s Presidential campaign slogan was “I like Ike”. And before it went out of business in 2019, the Thomas Cook Travel Company’s catchphrase was “Don’t just book it, Thomas Cook it”….All of which leads us to the phrase the financial press has often used to describe Target Date mutual funds: “Set it and forget it.”

Target Date funds (TDF) are most often employed in retirement accounts such as 401(k) plans, where the investor aligns his or her TDF with an expected retirement date. For example, an investor who turned 45 in the year 2000 might have chosen a “2020 Target Date Fund” — 2020 being the anticipated year of age 65 retirement. A fund such as this would begin with a high allocation to the stock market in the early years, and then taper that equity allocation in favor of bonds as the expected retirement year approached. To quote Investopedia: “ The asset allocation of a target-date fund thus gradually grows more conservative as the target date nears and risk tolerance falls. Target-date funds offer investors the convenience of putting their investing activities on autopilot in one vehicle.”

A December 15, 2018 article on MarketWatch offered these comments on Target Date funds: “A good deal of the money in 401(k) accounts is ending up in target-date funds. In fact, more than half of 401(k) accounts hold 100% of their assets in target-date funds, according to third-quarter data from Fidelity Investments. Target-date fund are investments tailored to an individual account holder’s age and retirement year. It’s essentially a ‘set it and forget it’ strategy because the fund will automatically rebalance itself to align with the investor’s age.”

All that sounds good, but many “set it and forget it” investors retiring this year were shocked to see that their 2020 Target Date Fund was not really “conservative”. According to an April 9th Bloomberg News article, the three largest TDF providers — Vanguard, Fidelity, and T. Rowe Price — each had half or more of their TDF 2020 allocation in stocks. T. Rowe Price, at 55% equities, had the highest allocation, and the fund’s return from February 20th to March 20th was a loss of 23%. The loss figures have diminished somewhat in the intervening market rally, but the risk is that when a retiree sees his or her portfolio drop by almost a quarter, there is a panic moment when some retirees will (and some certainly did) cash out and lock in their losses. Had these funds been on a truly more conservative glidepath, the less extreme losses would more likely have kept the otherwise panicked investors in the game.

Even if it does rhyme, there is a certain inadequacy to any “set it and forget it” mentality, particularly when considering how complex and fast-paced the world has become. We see governments and Central Banks attempting new, and radical, responses to economic problems. Just so, thoughtful re-evaluation in the face of changing circumstances should be a part of anyone’s financial plan.

It really is incumbent upon investors to think about (or hire an advisor to help take that deeper dive as to) where we are in economic cycles. While there will always be a divergence of opinion about the future, it is a fact that the U.S. stock market coming into 2020 had had a 10-year bull market, the longest on record. And, as cycles actually do occur, one would have observed the above fact and might have reduced equity allocations — certainly on the eve of retirement and the phasing out of a full paycheck.

Bottom Line: When it comes to investing for retirement, the Keats Heuristic just isn’t realistic.

 

* https://www.sciencedirect.com/science/article/abs/pii/S0304422X99000030
** https://www.poetryfoundation.org/poems/44477/ode-on-a-grecian-urn

Vice President, Joseph Seetoo, Interviewed in About Money – Should You Own Alternative Investments in Retirement?

About-Money---Alternative-Investments-Large

By Dana Anspach, Money Over 55 Expert
Updated March 16, 2016.

Alternative investments can offer higher yields to retirees, but they aren’t for everyone. To present both the pros and cons I reached out to Joe Seetoo, Vice President, Morton Capital Management.

Morton Capital, a registered investment advisor in California, specializes in bringing hand-picked alternative investments to their high net worth clients. They receive no compensation from the underlying investments which puts them in the perfect position to offer an objective opinion and do the research and due diligence that needs to be done before venturing into the alternative asset class world.

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