Teach Your Children How To Lose Money!

by M.J.Milner

Understand what your goal is for the money that you intend to leave as part of your estate.

When is a good time to instruct a teenager about the use of a rifle? How do you begin a course of instruction that might change a person’s life? Over time most adults have learned that the reason their investments usually are not maximized is because of operator error. Important life skills are sometimes not taught but left to trial and error. Consider firearms, pregnancy, and of course, equity investing. The key is to begin the instruction with an eye toward avoiding a large scale experiential error that might consume a lifetime attenuated by  hindsight. Small scale errors can be useful.

Due to the gift of magical thinking many adults expect their children to suddenly become financial risk managers just because they have died. Most people never have the “talk” with children about risk literacy, investing, gambling and taking losses and profits. Perish the thought that an impulse control disorder is not flagged early on. Many have never fully examined their own financial skill set discipline, let alone little Julie or Tommy’s. Generally speaking, in recent years, most inheritances ($177K on average) have been fully spent within 4-5 years. Probably not the intended protection originally intended, given the amount of time it took to accumulate it. What is the honest likelihood that your children will have better outcome in managing their inheritance? Many professional wealth managers have a floor of $500K or higher. Robo investments have yet to prove any real value over time. The distinction between growth and value has to do with the compression of fundamental pressure and time compression or expansion.

Giving parenting advice is usually a fruitless task but in this case it is not unlike telling parents to teach their children how to swim if they are going to live on a houseboat. It is not so much advice as it it opportunistic common sense that has an uncanny, but solid grasp of the obvious. The problem is when and how to begin. Just because you are afraid of the water and you can’t swim doesn’t mean that your child isn’t going to thrive at it. You just have to set them up for a safe initial plunge, and see if they panic or act like a porpoise. There is your world, and there is the real world you will one day release your children into. If you are risk adverse and your child is not, your hard work and savings plan might be all for nought. Would you leave your teenage child the keys to the car if they didn’t have a driver’s license? Financial rumors and investing classes are like used condoms. They offer little in terms of understanding the use ,application, risk and emotional motivation behind the activity that is linked to the fundamental experience.

Understanding diversification, position size, trading discipline and when to buy and sell, are skills that are only learned if saved/earned money is used for the instruction. Your pain is not their pain. Your task is to eventually take off the training wheels.

Most parents think they teach their children how to save money. Looking at the net effect over time, most of us are still trying to fly with only one wing. Modern children are no different. What we should be teaching is how to save, invest, diversify and grow money to self sustainable levels. The most important piece of information is an honest evaluation of the risk profile of each individual. This can only be gleaned from a live exercise with money that the individual has saved or earned. Consequences by definition have to inflict pain or reward, not unlike riding a bike. You really know nothing about another person’s risk literacy profile unless you have tracked their financial behavior eye to eye during high and low periods of financial perturbation. Can you identify you grandfather’s financial code, learned during the depression and handed down to your father? Its there, it may not be obvious, but its there. Never go into a bank with your hat in your hand. Shut the door, you’re letting the heat out-were you raised in a barn?

What is your financial code? Is your child’s personal risk profile the opposite of your own solid, financial code. How do you translate what you know to be true into a code that will be translated, internalized and integrated into the financial personality of your child? You are teaching them moral codes and the physics of injury avoidance, why aren’t you teaching them impulse control, emotional sequestration, and inverse crowd instinct deliberative execution? You know, “Buy low, sell high?”

Professional investors have the financial discipline required to maintain a steady return over time. The lucky ones average 8-12% per year. They know where they must stay on the risk spectrum in order to succeed. They learn with real money- every damn day, until it becomes instinct or they are shunned. The spectrum of human behavior ranges on that scale from an extreme penny pincher who will never takes a risk, and never has any exposure to possible losses, all the way to a compulsive gambler who will take every bet they are offered, regardless of the odds, probability, or previous results. Sometimes people will change over time from one, all the way over,to the other. Emotional fear of financial failure frequently motivates these transitions. Professionals have financial discipline and have learned “hands on” how dangerous mistakes can be. They know the size limit of a “position” and never exceed that line. They diversify among different assets, and invest in those assets over time. They buy the companies that are the best and are already moving up in price and volume, not the ones that might be next. They study which sectors are moving now and which ones are about to fall out of favor. They buy low and sell high and never try to capture the bottom, or top 10%. Their financial discipline is always dominant over their conviction that something is different, so the rules can be bent. Nothing is ever different- just the temporary emotional intensity of the investors feelings during volatile moves. Experience over time is the best teacher, that, and a mentor or trusted adviser who is wise, in these ways. Discipline should involve live and immediate-consequences and rewards. Is the smart money volume going into or out of a stock?

When is it too early to teach this to a child? Can a child learn to bite off a reasonable amount of risk and not choke to death?  My opinion is, lessons that measure one’s life are largely in place by age nine, but adjustable, before the later teen years. It may be easier to discuss sex with your kids,than investing. There is after all, less risk. Showing your children how to regulate their emotional risk taking and savoring the rewards of a soundly judged gamble can be highly rewarding for the parent. What is more valuable to the child is watching their unformed judgment go all in on an investment that goes horribly wrong, in spite of the rules set out. It is a molding experience of the fundamental kind. When it is their money that is lost, well, they are the ones that correlate emotional conviction against the trading discipline that they have been instructed to follow, because it works. The lesson equation isn’t complicated when the market moves against a position that is out sized for the inherent risk. Most children, if they see this article at all will not have read this far. Most parents have NEVER seen an article like this and if they have gotten this far they are going to finish it. Only a few of those will develop an action plan. A very few will browse away and refuse to look at what will happen if they don’t examine the issue at all. Don’t text and drive, honey. When markets reach record highs either take profits or hedge to protect them.

There is a difference between your risk profile and your child’s. Learn to respect, honor and encourage it, but give them objective rules based on real experience to live by.

Not surprisingly most parents only know how to invest within their own risk profile. It can be financially fatal to instruct a younger person how to invest, if they have a different risk profile. Oddly many children enjoy the appeal of dividend reinvestment so they need to learn to color outside the lines. When the pressure is on emotionally, kids will default to their real personal financial code, unless your adult judgment code has been fully ingrained as instinct into their personalities. That common wealth code (CWC) is universal, cultural, transferable, and comes in a short and long form. Your child’s true personal risk profile will fight that code until the translation and transfer occurs. Will luck that battle might occur before they reach majority. At this point you probably don’t really know what that profile is, because you haven’t actually examined it, with an eye to discovering your darling’s true personality. The most relevant piece of information in any financial investment profile is knowing what the risk profile is of the people who will eventually end up making the financial decisions. This is almost never taken into account. Learning financial maximums and understanding  them are two different things. The same is true of your risk profile code. You may think you are risk adverse and then find you own 100 shares of Apple that you bought at $120 as the stock bottoms out around $94. Know your profile and learn how to read other people’s- especially your children’s. This profile and the ability to adhere to a code of investment discipline is key to success over time. Volume and direction are cumulative, accretive trends.

Investments are the time machines of the twenty first century. They can compress the results of time or bleed out to infinity. Dead money is exactly that, dead. It will remain so forever. Trees do not grow to the sky and rebalancing a highly successful portfolio is a precise and very surgical task. You may not know where to start, so start with a few simple dollars.  My book on what I did during the correction in 2015 is loaded with lots of interesting bits of advice. It is cheap enough for a teenager($2.99) to purchase with money they have earned themselves. Here is the link:   Risk Literacy on Amazon (required reading) There is also plenty of information on TV and online. How does one undertake such a task? All investment advice should have source validation, an understandable catalyst and a time horizon.

Regardless of the size of the transaction most investors sell at dramatic bottoms and buy at dramatic tops. The FOMO  (Fear of missing out) reaction is difficult to identify, because it is emotional, not technical. During severe drops people panic and sell at “capitulation” levels- that is when people should be buying. Look up the definition of capitulation and apply it to a panic of herd proportions. These disciplines must be taught with live money that has been saved or earned, or the emotional reactions won’t have the emotional voltage required to ground a lasting lesson. The choice of stocks is up to you. Paper trading is a fun game but it isn’t wired into roaring success, or total financial failure, either. If possible start your investing small and at a market top or close to the bottom of a correction. You save money and wait. That is part of the CWC code- patience and strategy and tactic choice. A paper journal of your trading motivations and emotions is hugely valuable. Never forget the actual impact that the value of the international dollar currency can have on your investment,regardless of size.

Investing, gambling and creating wealth or poverty creates an altered mental state. Learn to identify the state and the person in the state.

Remember that sex, alcohol and drugs can alter results, but that those results will not be reproducible regardless of conviction. Wealth can be created, what is more valuable is the ability to generate disciplined wealth out of raw money. Look at some charts, learn what a P/E is and understand long term growth. I personally never give stock picks but only talk about tactics, strategy and discipline. I try to influence and correct the course and speed of the ship, not the cargo. You are the captain of your fate. So are your children. You have to work with real money or you won’t face real consequences. If the SEC announces the criminal investigation of senior management sell the shares before you finish reading the sentence.

One way to proceed is to show a child how to save. This can quickly generate money that can be invested. Dubious, read on…. Give them the job of saving money at the grocery store through coupons and sales. Your family menu will quickly change while shopping, by using coupons, store brands or clearance options and the amount of money saved can easily be determined. Start with half the money saved as a reward. This forms a partnership and allows for bonus grants. Instead of keeping this money in the “general funds” account where it will be used on items not on sale, it should be transferred to another account, immediately after it is saved. The savings investment account. The wealth code is- sequester savings, profits and investing funds from common accounts.  You can “match” these funds to increase the amount. You can also offer to give them half of the money when they graduate high school if they don’t have any tattoos or children. (You’re welcome.) Discipline requires discipline. Financial consequences of investing over time are highly motivating. Invest gradually in a good value investment trust to capture the fascinating effect of blending emotion, time duration and money. Some money made from speculation should always be put into dividend paying long term stocks.

For newbies with ADHD there are three new ways to invest- http://www.robinhood.com and http://www.etrade.com ,they allow small accumulations and trading over a smart phone-NO commissions. This fits well with the range of impulse disorders currently in fashion and teenage impulse trigger response. There is no commission, so you have a direct means of demonstrating buys, sells, holds, short and long term holdings, time pressure and most importantly you can observe the behavior and ask guiding questions. After a period of time you can move the money over to http://www.schwab.com where they allow you to buy incremental partial shares of stock for no commission.. Moving money from speculation to diversification is the second step in maintaining wealth. What speculation money does survive can be diversified on this excellent trading platform. This site is a “disruptor” and is the premier social investing site. Yes, social investing is a “thing”. Apparently it is OK with FINRA and the SEC! Then you can experience and experiment with diversification, dollar cost averaging, dividends and rebalancing. Most good investors know that market highs and lows or sector skewing results will trigger a rebalance. I rebalance quarterly, annually or on percentage of asset growth, depending on the goal of the portfolio.

Go ahead, save some money and then discuss what to do with it and let your child make the decision. Rinse; repeat!

The point of this exercise is to generate some losses on earned income that are based on emotional decision making that has gone awry. Those mistakes will generate good and bad feelings, recriminations, false claims, blame and arguments. In short a real discussion and actual pain, or glory. Refer to your journal for the best arguments! If you are locked up in in a bad stock or two, or fall into the “dead money pool” fairly quickly just give it some time. That is what financial autopsies are for, and conducting them isn’t fun. It is best to start small. The worst thing that can happen is your kid will have to address your lack of discipline and will teach you a lesson. The sooner you get this embarrassing “talk” over with, the sooner you will feel that your teaching efforts have actually made a difference in your child’s life. The point is not to be right, wrong or even become wealthy- the point is to have your money produce more wealth than you can. If your trade blows up and fails, don’t put more money into it- don’t say it is an investment and will come back. It is a trade that failed- liquidate it. 

Who knows, maybe you will learn something about your own risk literacy. If your child ends up demonstrating genius, make sure that your shoulders are broad, and you know how to stand straight. You’ll never see their view, but seeing into the future requires the blazing of a trail. Time probably hasn’t worked in your favor but it might work in the favor of your child, if they tame its improbable nature, with respect. There are always new investment opportunities and chances to act with assured, measured, and deliberate discipline, Harvard commas, notwithstanding.

Visit Us: www.riskliteracy.us  or    Risk Literacy Coach on FaceBook


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