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Saving & Investing Wisely – Part III:
Sharing Investment Wisdom With Adult Children

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
June 13, 2006

IN THIS ISSUE:

1.  “Don’t Ask, Don’t Tell”

2.  Competition For Your Adult Child’s Attention

3.  Teaching About Investment Risk

4.  Ways To Teach Your Adult Child About Investing

5.  Conclusion – Diversify Among Investment Strategies

Introduction

This week, I will offer the third in a series of articles designed to help you with teaching your children and/or grandchildren to Save & Invest WiselyPart I – May 16 in this series dealt with teaching younger children to save and invest wisely, and Part II – May 30 suggested ways to help your adult children improve their saving habits.

In this article, I am going to suggest some ways you can help your children or grandchildren become successful investors.  As I stated throughout this series of articles, you might not think it is any of your business to provide investment guidance to your adult children, but I believe it is our OBLIGATION as parents to teach our kids to save and invest wisely, even if they are grown and out on their own.

You may also be under the impression thatsince your child or grandchild has a business degree or other educational credentials, that they already know the basics of investing.  That might be true, but before you reach for the delete button, consider the results of a survey by the National Association of Securities Dealers (“NASD”) back in 2003.  The NASD surveyed over 1,000 people known to have made an investment in the past year.  To say the least, the results were surprising:

Overall, only 35% of those taking the survey scored a passing grade, and 97% admitted they needed to be better educated about investing.  And here’s the clincher: the survey found that older respondents (50+) did better than their younger counterparts (21-29)

While there is a chance that your adult children are in the 3% who do not feel they need any additional investment education, my bet is that they are among the 97% who would appreciate some additional help.  To find out, go to the following link to the NASD survey, print it out and give it to your adult children.  You might be surprised at the results.

http://www.nasd.com/web/groups/inv_info/documents/investor_information/nasdw_014495.pdf

As with previous articles in this series, this E-Letter is not intended to be an exhaustive discussion of “Investing 101.”  Instead, I am going to discuss why it’s so important for you to share your investment knowledge and experience with your adult children, and ways you can go about this task.  If you would like some pointers on basic investment topics, you can refer to some E-Letters I have written over the past year or so, listed in the “Resources” section at the end of this article.

And remember, even if you do not have adult children, you can use the suggestions in this week’s article in your own investment portfolio, or pass them on to others you think might benefit from them. 

“Don’t Ask, Don’t Tell”

We all remember this phrase from the Clinton administration and its policy toward gays in the military.  But it also is sometimes descriptive of the relationship between adult children and their parents when it comes to saving and investing wisely.  As the parent, you don’t want to meddle or be nosey.  At the same time, the adult child may not want to ask you for advice, because they want to leave the impression that they are self-sufficient.

Next, it may be that your adult children live in different cities than you, so it is more difficult to communicate.  Yet in this day of the Internet and e-mail, you can communicate with your long-distance adult children easier than ever.

Along this line, I want to bring up the topic of your adult daughters who are married.  In many (if not most) cases, it is your son-in-law who makes most of the investment decisions.  In such cases, it is even more difficult for you to find out how the son-in-law saves and invests the family’s money.  Here again, I believe it is your obligation to get involved since your daughter and grandchildren are affected.

One way you can get involved is by “gifting” money to your adult children and/or grandchildren.  I will discuss this issue in more detail in a future E-Letter in this series.  I mention it now only as a means to get involved with how your adult children are investing, even your son-in-law.

Meet Your Competition

At this point, you may be asking, “Why me?”  You may feel unqualified to discuss investment topics with your adult child, or be afraid that he or she may ask a question you can’t answer.  Actually, I think that would be part of the fun.  If a question is asked that you can’t answer, it would be a growing experience for both of you to investigate the answer.

However, I think the main advantage of helping your adult child learn to invest wisely is the value of your own experience over the years.  You might be surprised if you stop and look back at the “education” you have received as you have invested over the years, and there is no better teacher than experience, though we all know that even adult children don’t always listen and learn as well as they should.

One reason for the lack of listening skills might be the amount of competition you have for their attention. As I stated in Part II of this series about teaching adult children to save, there are a lot of other voices out there, each trying to influence your child’s spending and investing habits.  I mentioned how peer pressure can lead to unwise spending decisions, and the same can hold true for investment decisions. 

If you want to help your adult children chart the right investment course, it is important that you be aware that there are plenty of other sources of competition for their attention, and that these sources don’t always know what they are talking about.  I have found that younger investors often pick up information about investments from a variety of sources, including:

1.  The Financial Media:  Today, there are 24-hour cable TV networks dedicated to nothing but financial reporting.  The problem with these media outlets is that they have to fill their airtime with something, so they often pick up on the latest short-term trend and trot out a number of “experts” who offer predictions and investment tips.  As soon as the markets head the other way, still other “experts” offer advice that might be totally different than that previously given.

Don’t get me wrong, I love the financial news shows.  I have a TV next to my desk tuned to either Fox News or CNBC all day long.  I find them useful in providing what the market statistics are, and in following news stories about markets or business, but if you or your adult child want to follow the market on TV, do what we do – turn the volume all the way down so you can see the numbers but not listen to the ever-changing advice.

2.  Friends and Other Relatives:  In my May 30 article, I stated how peer pressure can affect your adult child’s saving habits (or lack thereof).  As noted above, the same can be true of investing.  In the Investment Advisor article entitled “Toxic Friends,” author Olivia Mellan describes the situation where investment decisions are sometimes based on friendships, and not suitability.  She goes on to explain that many investors, especially males, often lose money acting on tips from their friends.

Unfortunately, many financial educations are gained at the water cooler listening to the office stock jockey brag about his latest acquisitions.  Of course, these geniuses never tell you about their losing trades, just those where they made money.  Following the lead of such individuals might not only result in losses, but could also result in a hesitance to ever get back into the markets. 

Others have old school buddies or fraternity brothers who are now brokers and blindly follow their advice.  Just because the guy was entertaining at frat parties does not mean he, or his firm, are going to offer useful and accurate information and recommendations on how and where to invest.  Your adult child should use the same investigative process to evaluate an investment recommended by a friend as he or she would if a broker or advisor they didn’t know had recommended it.

3.  Internet Hype:  Most young people today are well versed in searching the Internet for all types of information.  However, the Internet is like a library – there are good books and bad books.  Unfortunately, the Internet doesn’t have a librarian to help you determine the good from the bad.  Add to this the proliferation of e-mail solicitations and polarized opinions regarding various investments and strategies, and you have a recipe for investor confusion.  You name the investment vehicle or strategy, and chances are there will be both pro and con opinion sites on the Internet. 

Another Internet-related issue is that it is sometimes hard to tell whether a source of information is independent of product sponsors, or merely a shill.  It can also be difficult to tell the difference between websites that offer actual money management services, and are thus subject to federal or state regulation, and those that offer only e-mail or newsletter advice, and you have to do your own trading following these written directions.  The latter, being largely unregulated, sometimes disclose only their winners and not their losers, but that’s a subject for another E-Letter.

I believe that it is important for you to teach your adult child to be wary of Internet solicitations of any kind.  I get e-mails every day that offer the latest hot stock tip (frequently a penny stock), or messages of gloom and doom, but with a way I can get rich from it.  It is true that fortunes are sometimes made on the back of adversity, but I think it’s pretty safe to say that anyone who knows the secret of doing so is busy making their own fortune, and not sending out unsolicited spam e-mails.

The above warnings about Internet and e-mail investment advice may sound strange coming from an Internet-based E-Letter, but you should teach your adult child to be very wary of any investments offered in an Internet website or via e-mail.  Fairly often, I have investors call my company who say they have been reading my E-Letter for two or three years, and have now decided that they want to learn more about the actively managed investment programs we offer.  I think this is a wise way to approach Internet investing, in that it requires the sponsor of the information to have staying power, and it allows the investor to determine the consistency of the message over time.

One last comment on Internet investment information is that you should encourage your adult child to read all of the small print.  It might be called “Disclosures,” or “Important Information,” or even “Form ADV, Part II.”  By whatever name, this information provides details about how the sponsor of the website operates, and it is important that you review this before checking out the rest of the website (especially the performance information). 

If there is no link to important disclosure information, then you might be dealing with an unregulated entity, which I consider to be a big red flag.  In the spirit of full disclosure, my company does offer money management services, and you can read our disclosure statement by clicking this LINK

Teaching About Investment Risk

Today, it seems that the focus of many investment promotions is on the historical return, with little mention of risk.  I think that’s why studies have shown that many investors’ returns suffer due to frequent switching from one investment to another, chasing the hottest performance.  I think performance should be evaluated in relation to the risk taken, and that’s a big reason why I think your involvement in teaching your adult children about investing is so crucial. 

As a general rule, I believe that older, more experienced investors usually have a better understanding of RISK than younger investors.  We need look no further back than the 1990s to see an excellent example of this.  While the price of tech stocks climbed into the stratosphere, experienced investors were warning about a potential major correction.  Many younger investors, convinced that it was “different this time,” laughed off the warnings, only to have their portfolios decimated by the bear market of 2000 – 2002, which saw the Nasdaq plunge more than 70%.

As I discussed in my May 30 E-Letter about saving, your personal experience can be a valuable resource for your adult children, but only if you share it with them.  Knowing how to make investments is only half of the story.  I think it is just as important to also teach them about investment risks.  Taking on too much risk can lead to losses, which must be made up before forward progress toward investment goals can continue.  Many young investors do not realize the devastating effects of investment losses, and just how high a return they have to make just to get back to break-even. 

In my April 5, 2005 E-Letter, I illustrated the relationship between losses and the amount of return you have to earn just to get back to where you started.  Because evaluating risks and avoiding large losses is so important, I have reproduced that “break-even” table below:

Amount of Loss
Incurred

Return Required
To Break Even

10%

11.1%

15%

17.7%

20%

25.0%

30%

42.9%

40%

66.7%

45%

81.8%

50%

100.0%

70%

233.3%


The point of this table is clear: buy-and-hold investors, and especially “index investors,” may subject themselves to losses that can literally take years to make up. This further illustrates the critical need to help educate your adult children about ways to achieve potential returns in the markets while also seeking to avoid large losses.

Before leaving the subject, I thought it might be interesting to relate an experience I recently had in relation to investment risk.  I recently had the opportunity to visit in person with a very successful middle-aged businessman who had parlayed his net worth to above $10 million, largely in real estate. This was one very smart individual.

Yet when the discussion turned to investing, it quickly became perfectly clear that this gentleman was a dedicated “buy-and-hold” investor, and almost all of his sizable investment portfolio was in low-cost “index” mutual funds.  As you know, index funds are designed to follow the market – UP or DOWN.  I asked him if it bothered him that some of the index funds he owns plunged over 40% in 2000-2002.  He replied: Well, the market always comes back if you hold on long enough.

I acknowledged that the markets have always come back, and that at his age, he probably does have time to ride it out.  But then I cautioned: what if you are 60 years old and the market plunges 40% or more; do you still have time to ride it out?  Maybe not.  Maybe you’ll have to work beyond 65 to have the retirement lifestyle you had previously planned for.  Lastly, I pointed out that it’s been six years since 2000 and the S&P 500 and the Nasdaq have still not fully recovered.

I explained to him how the main focus of my company is avoiding large losses in the first place by using “active management” strategies and professional money managers with a history of minimizing losing periods, or “drawdowns” as we call them.  This gentleman is a perfect example of how your adult children may have never heard of anything but buy-and-hold.    

How To Help Your Adult Children Invest

At this point, everyone should be on board with the idea that it is important to share your investment knowledge and experience with your adult children.  The question now becomes HOW to accomplish this task.  As I have noted in other articles in this series, parents and grandparents sometimes find it difficult to talk to adult children about money.  Even in strong families with good personal relationships, the subject of money is often “taboo.”

I have found that the reluctance to talk about investments is often more of a case of breaking the ice than discussing actual investment ideas.  One way to open up the subject of investing is to ask your adult child about his or her employer’s retirement plan coverage.  The subject of pensions and 401(k)s are always in the financial news, so it’s not hard to lead with that as an icebreaker. 

If your adult child is covered by a 401(k), then you have an even better opening to discuss the various types of investment options available, and which ones might be the most suitable.  401(k) plan sponsors are also required to provide basic investment education, so it might also be beneficial to ask about the type of investment education provided, what was covered and what your adult child learned from it.

Frequently, we find that 401(k) participants (and others) are diversified among several funds, but the various funds have nearly identical holdings.  Your adult child may not be aware of this.

Some 401(k) participants will chase returns by investing all of their money in the best-performing fund over the last year.  This is often a mistake, since a fund that was the best performer in one year is not likely to be the best performer in the next year. 

And what if your adult child is not covered by a retirement plan?  That might be even better, since it would allow you to ask if he or she is contributing to an IRA, and how it is being invested. 

Other Ways To Teach About Investing

Discussing your adult child’s retirement plan is not the only way to open up the subject of investing with your adult child.  Other ways include the following:

  1. Share your own financial challenges and have your adult child be part of finding a solution:  I have previously noted how important sharing your personal experience can be.  However, some parents do not want to admit there were times when they made the wrong investment decision.  Don’t let pride stand in your way of using your past investment challenges to teach your adult children.

    I think that both your positive and negative experiences can be among the most valuable ways of teaching your adult child.  By admitting that investing is a learning process, it might make your adult child more attentive to your ideas.  It can also send the message that it’s OK to have a loser once in a while, as long as you learn from the experience.

  2. Discuss life goals and how they can be met through disciplined saving and investing:  One way to bring the subject of investing alive is to relate it to your adult child’s important goals.  If the goal is to buy a house, it allows you to discuss how investing for a short-term need such as a down payment differs from long-term investment needs such as retirement.

  3. Avoiding investment scams - if it sounds too good to be true, it usually is:  Investment scams prey upon both young and old.  I have written before how many of these scams seek to appeal to either fear or greed.  For younger adults, the greed incentive is usually the strongest, and can lead to substantial losses.  If your adult child mentions an investment opportunity that sounds too good to be true, check it out with your local state securities regulators, or on the Security and Exchange Commission’s website at www.sec.gov.

  4. Safety does not always equal prudence:  One issue I have encountered a number of times involves investors thinking that a safe, guaranteed investment like a bank CD or fixed annuity is a “prudent” investment.  The idea comes from pension law, where trustees are required to exercise prudence in the selection of investments.  However, a “safe” investment with a yield roughly equal to the rate of inflation might be among the most imprudent investments for someone wanting to build wealth over the long-term.

    Granted, savings accumulated in a CD or fixed annuity may grow to a large sum of money over time, but if the rate of return is roughly equivalent to the rate of inflation, the buying power of these dollars may be little, if any, different than when it was set aside.

    You need to convey to your adult children that, as a general rule, it requires taking a risk to achieve a higher return.  Anyone who tells you differently should be referred to the discussion of investment scams above.  However, higher returns are usually needed to meet retirement and other life goals.  A good financial education should include an appreciation for both the risk and reward potential of an investment alternative.

    You should also be aware that some investors cannot tolerate any risk to principal, and your adult child may be among them.  If this is the case, your investment education needs to focus on saving more to offset the loss of potential gains that may have come from investments with principal risk.

  5. When to seek professional guidance:  There may be some of you who might feel unqualified to discuss investment topics with your adult children, or that your experiences may be irrelevant to your adult child’s specific situation.  If that is the case, you may want to call in a professional to provide the necessary expertise and guidance.  If you decide this is the way you want to proceed, you have a couple of options.

    First, you could give one of our Investor Representatives a call at 800-348-3601 with both you and your adult child on the line.  Our Representatives are very experienced in the securities business, and will be happy to spend the time necessary to provide guidance and answer any questions you or your adult child may have.  My company has clients all across the United States, most of whom we have never met.  Thus, we are very familiar with conveying investment ideas and concepts on a long-distance basis.

    If you prefer to have someone local where you can make an appointment and have a face-to-face conversation, I would suggest that you go to the Financial Planning Association (FPA) website (www.fpanet.org) and click on the link entitled “Find A Planner.”  The FPA is an organization whose membership is made up of professional financial planners who adhere to the FPA’s high ethical standards.

    If you do seek out a local professional, be sure to ask how the planner is compensated.  I recommend that you should select a planner who will meet with you for a fee, and not one who is compensated by commissions and will do an initial consultation for free.  The goal of the meeting needs to be the education of your adult child about investing, not a product sale.

Conclusion – Diversification Of Investment Strategies 

From my position as a writer and Investment Advisor, I can attest that there is no shortage of studies, papers, analyses and you-name-it to prove one form of investment is superior to another.  The truth is that, over time, various investment strategies perform differently depending upon the prevailing market and economic conditions.  Index investing could have you gain virtually nothing for 16 years as during the period from 1968 to 1982, while active management strategies may under-perform during periods like the late 1990s when the stock markets are going straight up.

If you choose to seek out a local financial planner in regard to financial education, it would be best if that planner is familiar with all types of investment strategies.  However, it is very likely that a local financial planner will have a preferred investment strategy to meet your needs, and may downplay any strategies that conflict with their approach to managing money.

In my opinion, the best course of action is to teach your adult child to become familiar with the advantages and disadvantages of different investment strategies, and then consider combining them within their portfolios.  This way, your adult child’s portfolio can achieve additional diversification over and above traditional asset allocation.

My company is a good example of this idea.  While we have the ability to recommend almost any kind of investment strategy, if you have read my E-Letter very long, you know that we specialize in actively managed investment strategies.  These strategies offer the potential to limit risks and produce absolute returns over time.

I chose to specialize in actively managed programs, not because other types of strategies have no merit, but because I saw that active management strategies were under-represented in the typical portfolio.  Many of my clients now have portfolios with both active and passive investment strategies represented. 

In closing, I hope the information in this week’s E-Letter will help you to find a way to open a conversation about investments with your adult children.  This is important because the younger a person starts to invest, the greater their potential nest egg at retirement.  The power of compound interest is strong, and the longer compound interest has to work, the larger the potential for growth.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

The Incumbents' Rights Act
http://www.opinionjournal.com/editorial/feature.html?id=110008505

How They Killed Him
http://www.time.com/time/magazine/printout/0,8816,1202929,00.html

The Media's Conveniently Changing View of Zarqawi
http://www.realclearpolitics.com/articles/2006/06/medias_conveniently_changing_v.html

 

RESOURCES:

Past Forecasts & Trends E-Letters with basic information about investing:

June 7, 2005:

How To Boost Returns In A Low-Yield World

June 21, 2005:

Getting Somewhere When The Market Goes Nowhere

September 6, 2005:

Things Money Managers Won’t Tell You…
Unless You Ask The Right Questions

September 20, 2005:

How To Make A Small Fortune In Commodities

November 15, 2005:

What Should Not Be In Your Retirement Plan

December 6, 2005:

The Perils Of “Index Investing”

January 10, 2006:

More Fundamentals Of Financial Planning


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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