Monthly Archives: November 2018

Did You Inherit Your Beliefs About Money From Your Parents?

Parents know that children hear, see, and pick up on everything that is going on with the adults in their lives. And when you were a child, you were no different.

Many of the attitudes we have about money were formed at a very early age as we absorbed how our own parents dealt with their finances. Some of these beliefs, such as a commitment to disciplined saving, are positive. Others, like skepticism about the stock market, can be more harmful than helpful as we try to build wealth in our own lives.

Answering these four key questions can help you look at your financial upbringing with a fresh perspective. When you’re done, think about which money beliefs you want to pass on to your own kids, and which might be preventing you from living the best life possible with the money you have.

1. What was money like growing up?

Your childhood experiences of money are a composite of details both big and small.

You probably compared the comforts of your home to what you saw next door and drew some conclusions about how comfortable your family was.

Did your parents get a new car every couple of years or drive around in the same car until it died? Did you take frequent holidays? What were holidays and birthdays like?

Watching mum and dad carefully balance their bank account or set next week’s grocery budget also might have made a strong impression. And at the more serious end of the spectrum, an unexpected job loss, debilitating medical condition, or death could have had a profound impact on your family’s finances.

2. What was money like for your parents growing up?

Many baby boomers were raised by parents who had to tighten their belts during the Great Depression and World War II. They probably impressed upon your parents the value of the hard work, the importance of saving, and perhaps some real apprehension when it comes to money. Your parents may have passed on these same values to you or swung in the opposite direction and tried to make money as stress-free as possible.

How much do you know about your parents’ childhoods? If they’re still living, ask some questions that will fill in your family’s history a little more clearly. You might learn something surprising. And you might gain some insight into how their experiences of money are still affecting you.

3. What specific lessons were you taught that you have continued?

Some people grew up in households where money was tight and may have viewed people with large amounts of wealth with suspicion or resentment. In other cases, hard-working adults have admiration for such people but underestimate how much hard work, risk and discipline it takes to build greater levels of wealth. Their children can learn to do the same.

On a more positive note, your parents may also made decisions that taught you what was more important to them than money. Perhaps they sacrificed their own leisure and comforts so that you could attend a good private school.

4. What was the best thing you were taught about money?

As a child you probably rolled your eyes whenever your parents passed on their beliefs about money or started reminiscing about what money was like when they were growing up.

Now that you’re the one doing the earning, some of those lessons probably ring true. “Live on less than what you make” is hard to hear when it’s used to explain why you can’t have a new bike or take a big holiday. No child wants to sacrifice their weekends or summers working part time because their parents insist on it. But the lessons that were hard to swallow when we were young often create attitudes and habits that benefit us as adults.

The sum of all these memories, the positive and the negative, is a blueprint to your financial thinking. It’s also the schematic that we use to build your life-centred financial plan. Come in and share your blueprint with us so that together, we can lay a strong foundation for your family’s future.

Corrections and the Nature of the Markets

Currently, markets around the globe are ‘selling off’ due to worries ranging from trade policies and tariffs to rising U.S. interest rates to geopolitical concerns. Rather than be alarmed, however, we should consider whether this is merely a return to more “normal” conditions and not necessarily a sign of worse to come.

Why do we say a return to more “normal” conditions?

First, let’s think about the nature of investing and the relationship between risk and return. Also, remember that risk and uncertainty are related: the latter brings about the former, and with more uncertainty, the potential for future payoff may also be greater.

We have all been vulnerable to forgetting the nature of risk and uncertainty in the markets; the Central Banks interventions into the markets has pushed the stock market seemingly straight up since March 2009, with just a couple of corrections in between.  With higher expected returns, we should expect volatility, as that is the mechanism through which investments ultimately find their true value. When discussing corrections, we should consider three basic issues:

Why they exist,
Why they are natural, and
Why they are necessary.

Corrections (when they occur) exist because facts become more widely known and understood, or alternatively, they change altogether. News flows are constant and are almost always unpredictable. Random events confound even the most carefully-made forecasts, which then must be discarded. Conventional wisdom is re-examined, and new data provides investors with deeper ways of thinking about an investment, or even the markets as a whole. Armed with fresh knowledge, investors may change their minds. And that may mean responding with “sell” instead of “buy.”

Market movements are natural because the data does change and people, in turn, change their minds in response. In a static world, there would be no corrections – nor would there be many opportunities, either. In that world, all investments would always be priced at their “fair value” and would never deviate in a way to provide an entry point to buy a new opportunity. Investors constantly research, analyse, and evaluate investment opportunities. Information on those opportunities is constantly being released and thus is constantly changing.
Being early to capitalize on that changing information means some investors are quick to act – and when they all act at once, then the market may either surge higher or plunge lower. It is a natural course of action for market participants, upon realising the same new information, to act quickly to buy or sell.

Corrections are necessary because it is through this mechanism that risk is fairly priced. What do we mean by this? Quite simply, stocks, bonds and other investments are determined by what investors are willing to pay for them; this depends in turn on what people expect will happen in the world. The more uncertainty there is, the lower the price one is willing to pay for an investment, because there are more ways that the investment can be pushed off course. In this situation, most investors want a greater degree of protection when buying a stock – and that means a lower price. A correction, thus, is a way in which a sign that says “Special! Sale Now On!” is hung over the market, perhaps signalling buying opportunities. Indeed, it’s often the time when many investors go shopping for things they might not otherwise have bought when they were more expensive. It’s simply how the market works, much as in a department store.

In fact, it’s completely abnormal not to have corrections. We’re quite overdue, in fact. We’ve become complacent, forgotten how they feel or even what they look like. Having one, or even more of them would be a return to normal. In this case, “normal” means an environment with more volatility; that is, the very thing which investors undertake in order to receive the returns they expect. It’s a natural, expected, and customary trade-off.