ALLOWING YOUR KIDS TO FAIL CAN HELP THEM
As parents, the ultimate goal for most of us is to teach our kids the skills necessary so that they can make it in the world on their own.
However, this means showing some tough love at times by letting them not only experience failure but also even encouraging it.
Sara Blakely, the founder of Spanx and one of the youngest self-made female billionaires in America, has recalled that as a child her father regularly asked her at dinner time what she failed at during the week and when she told him, he responded with a high-five.
Unfortunately, some have taken a different approach by choosing to shelter their kids from failure, even going as far as rigging exams and bribing universities.
When it comes to investing in our kids’ future, having a plan and involving them in it is imperative — and the earlier the better.
This means showing them the importance of goal setting, taking calculated risks, and how to respond to potential outcomes.
In the investment business, we call this goals-based benchmarking.
A particular goal or objective is set and a financial plan is built around trying to achieve that goal while minimizing the risk taken to get there.
There may be failures along the way, but having a plan and sticking to it will help remove the chance of an emotional response that will impair the probability of achieving one’s long-term objective.
While young people sometimes complain about the lack of resources available to help them manage their finances, there is nothing stopping them from applying the same concepts on a reduced scale. For example, for teenagers just starting out, cash inflows from part-time work, allowances, gifts etc. can be mapped out against outgoing expenses, teaching them how to save for a particular goal whether it be a mountain bike or even their first car.
If there are family financial goals that affect them directly — such as saving for education — or in which they can play a part, they can be asked to participate in the overall family plan.
The final step is to design a portfolio that will help achieve those goals. When savings are invested, we would recommend using more than GICs or savings accounts but also ETFs or maybe even a few stocks, using it as an opportunity to teach about investment risk and the merits of diversification.
In a December interview with Yahoo Finance, Ray Dalio, the founder of one of the world’s largest hedge funds, Bridgewater Associates, offered some great financial advice to millennials on this topic: “When thinking about what you should put your savings in, realize that the least risky investment from volatility ... which is cash, is the worst investment over a period of time. And you can judge that by judging the rate of inflation in relationship to the after-tax income you’re gonna earn. You have to move into other assets that are going to do better over a period of time.
“And when you do that, the most important thing I can convey to you is to diversify well.
“Because I can guarantee you that one of those assets, and you won’t be able to pick the right one, will be disastrous in your lifetime.
“That you will lose half of that savings if you’re in the wrong one.
“And you won’t know what the right one is. So pick different countries. Pick different asset classes.”
The more proactive you are, the greater the likelihood that your kids will not only be financial independent but recognize the benefits that come with that freedom.
This means not shying away from risk but managing it effectively through goals-based planning and diversified investing — and that’s worthy of a double high-five.
Financial Post Martin Pelletier, CFA, is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.