What A Medieval Leader Can Teach Us About Finance
The chorus of financial advice is getting louder. More pundits, experts, and analysts are offering their brand of insight. Finding the signal amid the noise is becoming difficult. Moreover, this cacophony is even more vexing to parents seeking to instill a simple message of financial responsibility within their children. Perhaps instead of looking to the forecasts of the “professionals,” we can learn something by looking to the past. That is, over 800 years into the past when Spain was a battleground.
Rodrigo Diaz de Vivar was a medieval military leader in Spain. Many called him “El Cid.” In 1081 the beleaguered general was in desperate need of supplies. He had no money. He filled a large, wooden chest with sand and secured it with three locks. He offered the ruse to creditors telling them the contents had enough value to secure a loan. Trust won the day. The lenders agreed to provide El Cid with the requested money.
In time, El Cid made good on his promise. He repaid the loan and the chest, unopened, was returned. The lesson: managing money is rooted in trust. Today the chest sits undisturbed in Spain’s Burgos Cathedral. Outside the church is a statue of El Cid, remembered today as The Lord Champion.
Perhaps his creditors were foolish, but the story underscores the power of trust in developing a relationship with money. How can parents empower their children with such a level of trust?
Operation Windfall
The story of El Cid offers some clues to teaching your children financial responsibility. Show them you understand their capability by entrusting them with money. By putting them in the driver’s seat, you’ll send a message of respect. Your children will mirror this sentiment by exercising self-discipline. How can parents most effectively communicate their trust? Consider a large outlay of allowance money, perhaps three, six, or even twelve months worth, at one time. Welcome to Operation Windfall.
When parents deliver an allowance piecemeal, they prevent children from learning the most critical aspect of fiscal responsibility: self-discipline. The most crucial component of wealth, compounding, is built upon the simple strategy of postponing consumption. That is, you will be rewarded later for limiting spending today. Children lose this critical aspect of wealth building when parents manage the steady flow of cash.
Are children in need of this lesson? Absolutely. Consider the findings of a 2008 Survey of Financial Literacy, which reports that only five percent of high school students could define compound interest. This finding means that nearly all young adults fail to grasp what Einstein called the “eight wonder of the world.” He also astutely warned that “he who understands it, earns it … he who doesn’t … pays it.” If compounding is a foreign word to kids, then a parent’s vocabulary must change. We’ll start by eliminating one world…
Remove the Word Allowance From Your Home
Replace “allowance” with “budget.” An allowance conjures images of a steady stream of cash passing through the hands of a child and into toys and games. A budget is something different.
With a budget, kids begin to think of money differently. They think of the future. This capacity for forward-thinking is the very reason for human’s survival; it is a concept as old as humanity. Early hunter and gatherer cultures learned to stockpile food and other resources in anticipation of colder seasonal weather. With a budget, your child will learn to do the same.
Problems will arise; after all, that’s part of the drill. Kids will lose their wallet or purse. They’ll overspend and find themselves short when going out with friends. You can predict whom they’ll turn to in these times of need: mom and dad. Are you ready to say no? Be sure that you are before you put Operation Windfall in place. Without a commitment on both sides, the plan is sure to fail. Learning consequences is part of the routine. The best way to limit this problem is to encourage budget building.
It Starts With A Pencil and Paper
A budget should begin with a sentence, not a number. Have your children write, in their words, what they want. Perhaps they will decide they want to reach a savings goal. Maybe they have their eye on an expensive toy. The end goal doesn’t matter much. Instead, the purpose is to commit to a plan.
Guide the process with questions rather than dictation. Ask them what they think is best. Determine what they believe they can afford and what things will cost. Let them put the pencil to paper. They will be the navigator of their future.
Lastly, parents seeking to tie finances to chores and school performance can still do so under the Operation Windfall plan. How? Remind your kids that they next lump sum payment will only come to them under the condition that they maintain a certain academic standard. Additionally, the agreement, also in written form, can include guidelines for behavior and help around the house. Set specific goals, so there are no misunderstandings later. “Earn good grades” is not a goal, “earn a B+ or better in Math for the second marking period” is.
If El Cid can rally a Spanish army with a chest of sand surely, you can rally your kids with a plan.
Using The DJIA To Predict the Long-Term Economy Just One Day After The Election
Can we accurately predict how the economy will perform based on the outcome of a presidential election?
Three researchers have the answer.
A lesser-known 2014 study published in the Journal of Business & Economics Research set out to “examine how Wall Street’s reaction to a presidential election acts as a predictive measure of future economic performance." The research of 27 different presidential elections builds on the efficient market hypothesis. The hypothesis posits that share prices in equities will immediately reflect all relevant information. Therefore, under this theory, if the stock market believes the president-elect is capable of growing the economy, then the market will deliver greater share prices shortly after Election Day.
Their study began with a review of the 1-day DJI (Dow Jones Industrial Average) change following Election Day. The researchers then analyzed long-term DJI performance for Republican and Democratic presidents. The published data shows superior long-term market performance with a Democrat in the Oval office rather than a Republican.
This data isn't new. Firms like Forex have reported this trend by explaining that,
“Stock market returns are higher under Democrats than Republicans with the average annual return under Democratic presidents since 1900 being 15.31%, compared with just 5.43% under Republicans.”
However, what does the data tell us about GDP performance? The report shows that the average cumulative four-year GDP growth under a Democratic president is 18.51 percent since 1900. For Republicans, over the same period, it's just 10.71 percent. This too has been reported before.
However, these three academics took the analysis one step further.
The authors examined if the initial positive/negative market movement matched the ability of the president to grow the economy. Their results showed that “the market has been more and more accurate and efficient in predicting the future GDP growth and the future market return under a president.” This accuracy has emerged only in recent history. Including all the data going as far back as 1900, the 1-day DJIA change offered no real indication of future GDP. However, the researchers discovered a recent dramatic improvement in the predictive power of the DJIA reporting that,
“For the most recent ten administrations, the 1-day DJI percentage change following the Election Day is a significant predictor of the cumulative GDP growth of the following four years.”
The market is getting smarter.
Leading up to the 1980s the correlation between these two factors is weak. The values range from -0.15 to -0.52. After 1988 the same measurement makes a bold ascent reaching as high as 0.67 where it resides near the time of the researcher's publication.
The increasing correlation between DJI change and GDP growth better equips us to predict the long-term economy using market data right after the election.
Records and statistics offer unambiguous insight into the influencing power of political parties. What's less understood is how this data drives the decisions of the voter. As we've previously reported even the best-informed citizen frequently succumbs to the quiet influence of cognitive bias. In less than two weeks, voters will set the switches on the tracks for two potentially very different economic outcomes.
Look to the 1-day DJI change on November 9th to confidently answer the question: what’s in store for the long-term GDP?