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Bear's bite brings lessons to kids
Wednesday, February 18, 2004
Stanley Tepner knows only too well the difficulties of trying to educate a teenager about smart investing when the Top 40 music hits have a lot more appeal than the S&P/TSX 60.
But lately, the Toronto financial adviser has noticed his 15-year old stepson, Michael Rosen, taking more interest in what the markets are doing.
"Simply reading or hearing the news about stock markets going up and down means nothing to Michael. But being able to see his registered education savings plan move up and down with the markets makes it truly personal. It lets him feel a bit of the same worry, apprehension and concern that adult investors have about their portfolios," Mr. Tepner says.
Indeed, while markets are snapping back after a prolonged dip throughout most of the early 2000s, the ride has been nerve-wracking to anyone with their money on the line.
On the bright side, however, there's been no shortage of financial management lessons to be gained from that experience. And many parents are trying to pass those down to their kids to help them become better investors.
Mr. Tepner, for instance, stresses the importance of having a fully diversified investment portfolio designed to withstand market shocks.
"I tell Michael that you look at what your time horizon is and adjust accordingly. The closer you are to needing that money, the more you want to secure the funds already in there," he says.
Some parents have, in fact, made adjustments to their children's RESPs over the past couple of years, particularly as they neared university age and could least afford a market downturn.
Certified financial planner Clair Johnston has noticed that trend, too, as some clients cut back on their RESP exposure to equities. "Together, we've decided their risk tolerance level isn't as high as what they initially thought it was," says the Ottawa-based planner with Investors Group Financial Services Inc.
One of the key themes to come out of the market volatility is the simple but valuable maxim that wealth takes time to accumulate and everybody needs to have a long-term financial plan to achieve their goals, says Dan Bodanis, a senior financial adviser with Dundee Private Investors Inc. in Mississauga, Ont.
Parents need to make their kids aware that long-term investment involves making regular financial contributions, known as dollar-cost averaging, when the market is both up and down, he adds.
In other words, they need to avoid what many did during the bull market : leaping in euphorically, and then going to the other extreme by pulling the plug when markets turned south .
"We tell people to avoid greed but also to avoid fear, which I believe are the two biggest enemies of investing -- not to get too greedy when stocks are going way up and also not to fear when the market is correcting. That's sound advice for everyone and should resonate the same with children or teenagers," Mr. Johnston says.
In fact, often the best time to make a stock purchase is when the market is down. Mr. Bodanis suggests parents draw analogies to drive home that concept to kids. "A younger child could be told, for example, that it would be like getting a set of hockey cards they really wanted at a big discount. The same thing might be explained to an older teenager by telling them if they had the opportunity to buy a car they liked at a 20- or 30-per-cent discount, they'd probably leap at the opportunity."
The opposite dictum holds true as well, as one of Patricia Tyrrell's clients, a college student, was saved from learning the hard way in 2000.
He wanted to invest his savings from a summer job in Nortel Networks Corp. stock when it was over $100 a share but was warned against it by Ms. Tyrrell, an investment adviser with Raymond James Ltd. in Toronto.
Luckily, he listened and avoided any damage when, over the next year, the stock plunged to less than 5 per cent of its former value. "I think that his having come very close to buying Nortel at the top and then seeing what happened after was an extremely good lesson to learn," Ms. Tyrrell says.
One of the problems in teaching financial lessons to young people is they tend to have a short time horizon, experts say.
"There's a mentality out there right now that everything has to happen immediately - it's almost an instant gratification (requirement). But you're not getting that in these markets," says Patricia Lovett-Reid, a senior vice-president with TD Waterhouse Canada Inc
That may have provided something of a silver lining by forcing investors to become more disciplined and to take a longer-term perspective, something older children can pick up on. Ms. Lovett-Reid notes how, for instance, public discussions emanating from the stock market's wild ride have "certainly piqued the curiosity" of her four teenagers aged 15 to 18 -- something she's not sure would have happened otherwise.
Furthermore, that public discussion might also help fill a void, because while parents are often diligent about passing elementary financial lessons down to their children, more complex issues sometimes fall by the wayside.
"We always talk to children about not spending more than they earn and we also teach them about the budgeting process. But as they go off to university, we're still only talking about the budgeting process (whereas) the next phase of their financial education -- investment strategies and how to make them work -- can fall off the radar screen," Ms. Lovett-Reid says.
She adds how important it is for young people to learn those lessons early, so they form the proper investment habits and discipline necessary to sustain them for the rest of their lives. It's a message she frequently takes to students in high schools and universities.
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