by Jim Whiddon
So far, we have seen how “practice makes perfect” in Talent is Overrated and discovered the importance of developing right-brain capabilities in A Whole New Mind. In my final installment of articles on the subject of guiding our youth into financial and professional adulthood, I will take a look at another important question: “What motivates our children to do well?”
For the answer, we will once again rely on a book by Daniel Pink: Drive, The Surprising Truth about What Motivates Us.
Essentially, motivation can be thought of as a reason to act in a certain way. Synonyms for it include “motive,” “inspiration” and “inducement.” As parents, we have the delicate task of nudging our children in the right direction without being “pushy,” which often can have the opposite effect we desire. But, like all deeply motivated adults, I believe our children also long to be a part of a cause greater than themselves. As parents, how do we cultivate this desire and combine it with their talents and intellectual make-up (right-brain, left-brain) to promote their success and equip them to make significant contributions to society?
First, we must understand the three types of motivation. Pink outlines them in this manner:
Motivation 1.0 is a given. Motivation 2.0 deals primarily with the extrinsic, the external system of reward and punishment that’s familiar to us all in our capacity either as recipients or as the agent of its application. Given the fact that we all seek to gain pleasure and avoid pain, this extrinsic system serves a valuable purpose at times. For example, from an economic standpoint, during the Industrial Revolution, the goal was to get factories to function at an efficient level. This meant motivating workers. The “carrot and stick” behavior management approach was useful in convincing the manufacturing organization to run smoothly. If you want to improve performance and productivity, you reward the good and punish the bad. It’s pretty simple.
With children, a classic “carrot” is to offer monetary rewards for good grades; a classic “stick” is to ground them for bad ones. This was an almost universal technique during my school-age years, and it continues today as well. The trouble is, according to Pink and the research he cites, that these types of incentives not only ignore the intrinsic motivation which will serve our kids better in the long run, they also can diminish performance, crush creativity and become addictive. None of these things are what we want to teach our children if the goal is to equip them for long-term success.
On the other hand, under the rubric of Motivation 3.0 – or an intrinsic “operating system” – you will characteristically find more opportunities for creativity and right-brain undertakings. But most importantly, Motivation 3.0 gives us the best opportunity to experience what Pink calls flow. Flow is the state of optimal challenge.
First of all, it is important that Pink uses the word “optimal” instead of “maximum.” Optimal connotes a “best in class” standard with more discoveries and improvements to come. A commitment to life-long learning is implied. But what does “being in flow” really mean? Pink explains:
“The highest, most satisfying experiences in people’s lives were when they were in flow. ...In flow, goals are clear. You have to reach the top of the mountain, hit the ball across the net, or mold the clay just right. Feedback is immediate…. Most important, in flow, the relationship between what a person had to do and what he could do was perfect. The challenge wasn’t too easy. Nor was it too difficult. It was a notch or two beyond his current abilities.”
Furthermore, environments that promote three key elements – autonomy, mastery and purpose – are most likely to foster a state of flow.
Autonomy can be the antidote to mediocrity, Pink says. It is not the same as independence. Rather, it means acting with choice while still being interdependent with others. “Autonomous motivation promotes greater conceptual understanding, better grades, enhanced persistence in sporting [or other extracurricular] activities, less burnout, higher productivity, and a greater feeling of psychological wellbeing.” With my own children, my wife and I practice oversight without micromanagement. For example, we might tell them: “You should start studying now for that history test next Tuesday.” Then we let the chips fall where they may. If they decide not to take our advice, they’ll soon come to understand on their own the futility of “cramming” for a test.
Mastery is “the desire to get better and better at something that matters.” This can mean making better grades, reaching a career goal or improving a relationship. The feeling that comes from mastering something increases productivity and satisfaction. This can be as simple as providing positive reinforcement for a child with, for example, an interest in art. Perhaps you complement them on the progress they are making with a sketch or painting. My wife and I are not overly concerned with which interests our children pursue as long as they pursue one. If we see that it matters to them, then it matters to us.
Finally, Purpose refers to “belonging to a cause greater than ourselves.” Psychologist Mihaly Csikszentmihalyi says, “Purpose provides activation energy for living.” It is the ultimate motivator, and parents who can harness its power in the lives of their children will do them a great service. Team sports are ideal for teaching this lesson. But even if your children have no athletic proclivity, finding any organization they can be a part of at a young age will foster a sense of purpose in their lives.
What can we garner from our time together over the last three months? Here it is summarized in three crucial points: 1) having a commitment to applying our talents through disciplined practice (Talent is Overrated) is extremely important, 2) developing a right brain-left brain balance (A Whole New Mind) is a critical component to excelling in the new economy, and 3) seeking to promote and create an environment of autonomy, mastery and purpose, leading to a “state of flow,” will benefit us, our friends and co-workers. Most of all, it will benefit future generations – our children – as we all face the challenges and seize the extraordinary opportunities that lie ahead.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Q: What are callable bonds? And what are the risk and return of callable bonds?
A: Callable bonds are fixed income securities that give the issuer the right, but not the obligation, to call in, or prepay, the bond prior to maturity. Issuers can be expected to exercise this right if they are able to reissue new debt at lower interest rates, once all costs of a recall and new issuance are considered.
The presence of the call feature greatly affects the risks and potential rewards of owning a bond. The failure to understand this risk creates the potential for large losses and investors being abused by broker-dealers. Most municipal and agency bonds, as well as some corporate bonds, have a feature that gives the issuer the right, but not the obligation, to prepay the principal (prior to maturity) on a specific date or dates. This call feature creates significant risk to investors, for which they do receive a higher yield as compensation. The higher yield creates the potential for great returns but also, depending on the price paid for the bond, the potential for underperformance because the issuer will only call the bond if interest rates have fallen significantly since the time of issuance (rates need to have fallen sufficiently to overcome the cost of a new issue to replace the original one).
When an investor purchases a bond with a call feature, the incremental yield slightly shortens the bond’s duration. As a result, if rates rise, the value of the callable bond will not fall quite as much. But in accepting this benefit, the investor is also accepting the risk that, should interest rates fall significantly, the bond likely will be called by the issuer (assuming the issuer has maintained its credit worthiness). Because of the higher incremental yield, many broker-dealers tend to build portfolios with longer-maturity bonds that contain short call features. Longer-term bonds typically have higher markups, so this strategy allows brokers to charge higher markups in the hope that the bonds will get called, giving them the opportunity to mark up another bond. This strategy can have negative consequences to investor when interest rates rise because the duration of the portfolio could rise dramatically, adding more volatility. The same is true if rates fall because this is when bonds will typically be called, leaving the client to invest in a low-interest-rate environment.
Bottom line: When analyzing whether a callable bond is an appropriate investment, the investor should consider whether the higher yield is sufficient compensation for the risk that falling rates will lead to early redemption of the bond. It’s also important to keep in mind that the call feature is there to benefit the issuer and not the investor.
We prefer to build ladders with either non-callable bonds or bonds with at least 80 percent call protection. This approach provides more “control” over when the funds come due as well as the duration, allowing the ladder to stay intact.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Q: Should you stay invested in the short term while waiting for interest rates to rise?
A: First, other than very short-term interest rates that are heavily influenced by the Federal Reserve, it’s difficult to predict changes in interest rates. Second, to determine whether a short-term fixed income approach will be superior to an intermediate-term fixed income approach, you need to know that rates will rise and that they will increase by more than what the market already projects. This second point is one of the most fundamentally misunderstood concepts when it comes to fixed income investing. The ability to correctly predict such changes would be enormously valuable, but research continually shows that doing so is virtually impossible.
Market Expectations for Interest Rate Increases
Using current market interest rates, let’s compare two investment strategies covering the next four years:
1. You can buy a four-year bond with an expected return of 1.80 percent per year and hold it until maturity.
2. You can buy a two-year bond with an expected return of 0.80 percent over the next two years, hold it until maturity and then buy another two-year bond and hold it until maturity.
A simple question to ask: When will the first strategy produce higher returns than the second strategy and vice versa? Crunching the numbers reveals that the only way the second approach will come out ahead is if the expected return on the second two-year bond that you purchase is greater than 2.80 percent. So for the second strategy to outperform the first strategy, interest rates on two-year maturity bonds must increase by more than 2 percent.
This simple example shows that knowing interest rates will increase is not sufficient. You also need to know whether they will increase by more than what the market has already accounted for.
Bottom line: Investors can benefit from taking minimal credit risk in their fixed income portfolios and by generally keeping their portfolios fairly short term in maturity. This, however, does not mean investors should keep everything in very short-term fixed income at all times. In environments in which the yield curve is steep, it can make sense to move a portion of your fixed income portfolio out a bit longer in maturity.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.