Attitudes Towards Risk and Their Impact on Children

Sue BerginSue Bergin

An investor who is unaccepting of some investment risk limits potential opportunities for significant growth in their portfolio.  Even so, many such investors are satisfied as long as they remain in the black.  An argument of lost opportunity costs falls on deaf ears.  When you, as their advisor, point out that they are limiting their future growth potential, they are ok with it.  But, what if they thought that their risk aversion might have negative consequences for their children.  Might they look differently at their attitudes towards uncertain investments?

shutterstock_59441101A recent U.K. study shows that children of risk-averse parents scored lower on standardized tests.  They were also 1.34% percent less likely to go to college than children of parents who are more accepting of risk. [1]

According to the researchers, risk-averse people by their very nature may be unwilling to make inherently uncertain investments.  For example, they may be not be inclined to fund a private school education because they cannot be assured (guaranteed!) that it will result in greater successes for that child. Put another way, aversion to risk makes a person less likely to invest in their child’s human capital.

The researchers hint at another possible explanation for the phenomenon. They suggest that attitude towards risk reflects cognitive abilities.

For those of us who work with some incredibly bright, risk-averse clients, the first explanation seems more plausible.

[1]Parental Risk Attitudes and Children’s Academic Test Scores:  Evidence from the US Panel Study of Income Dynamics.

Municipal Market Update by Dan Genter, RNC Genter Capital Management

The city of Stockton, CA has decided that it will file for bankruptcy protection under Chapter 9 of the Federal Bankruptcy Code. This announcement is likely to be a national news item that may catch the eye of many investors.

This call to bankruptcy was anticipated considering that Stockton had already defaulted on its debt and, for the last 90 days, had been in a mandatory mediation period in an attempt to negotiate concessions in labor costs and benefits, which are currently almost 70% of the city’s general fund. We do not believe this headline will be considered unexpected or that it will have a negative impact on the municipal bond market.

We also do not consider that this is the start of an epidemic among municipal entities to use default or bankruptcy strategies. Though there may be more smaller entities that will use this option going forward, we view this as more of a politically expedient approach versus a viable solution, which will generally be adopted by municipalities under financial stress.

Frankly, it is hard to understand after the Vallejo, CA experience that a municipal entity nearby would even consider the bankruptcy route. Vallejo spent many months initially having the bankruptcy proceeding approved (it is not as automatic as with corporations), spent three years in bankruptcy proceedings, spent $10 million in legal fees, and almost a year, after emerging from bankruptcy, is still struggling to meet the mandates that were dictated by the bankruptcy court. Considering that their tainted reputation has now effectively barred them from the capital markets, and that the ultimate concessions that they received in bankruptcy mirrored what likely would have been accomplished through diligent negotiations, they clearly have not established an attractive road map for others to follow.

It does reaffirm, however, that smaller municipal entities continue to be under stress and that clients should be very cautious in stretching for yield.