Are you a financial daredevil who gets a thrill out of the ups and downs of the stock market? Or do they make you feel queasy?
Your feelings about money can have a big impact on your investment decisions, so it's worth being aware of the people and experiences who have shaped those feelings. That can help you understand those influences—and move past them, if they have led to bad financial habits.
“Often our behaviors come from what we were exposed to as children,” says Michal Ann Strahilevitz, a professor at Saint Mary's College of California who studies investor psychology and behavioral economics.
These three financial influences and experiences from when you were a kid could have bearing on your choices today:
1. How your family handled money
Your family’s financial situation and the choices your parents made may have shaped how you handle money. The actions then that could affect you now could be as small as whether your parents tended to pay with a credit card or as big as one of them losing their job.
"If one of them did badly in the stock market, you are more likely to avoid investing in the market," Strahilevitz says. “If they were successful in the market, you’re more likely to mimic their investing strategy.”
Sometimes, kids who grow up witnessing their parents make money mistakes intentionally go to the opposite extreme, she says. If you saw your parents struggle with credit card debt, for instance, you might avoid credit cards entirely.
2. Whether money talk was taboo
Young children don’t really understand money, says psychologist Frank Murtha, co-author of “MarketPsych: How to Manage Fear and Build Your Investor Identity.” But they do learn a lot from their parents’ emotions and attitudes.
“A big part of what gets internalized is how afraid they should be,” says Murtha. “Is there a sense of security around money, or does the subject provoke anxiety? People [who] experience money worries as kids are more likely to carry forward that sense of scarcity and insecurity.”
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3. What was happening in the economy
Even if your family hasn’t experienced a big financial shock, the economy at large may have influenced your ideas about money. For example, young adults who came of age during the Great Recession have been notoriously skeptical of the stock market, despite the fact that investing can help you reach your goals.
Fully 3 out of 5 millennials own no stocks, according to the St. Louis Fed, in part because of the events they witnessed during the recession. “The 2008 market crash is pretty hard to forget,” says Jamie Foehl, senior behavioral researcher at Duke University’s Center for Advanced Hindsight.
Lessons learned in childhood are powerful, but they don't have to limit us, Strahilevitz says.
"Awareness is the first step with everything—realizing you have an issue,” she says. “If you overreacted to parents losing everything by staying out of the stock market, you can learn maybe it was just bad timing.” You can still make choices, and you can tell yourself, “‘I will become more educated.’”
May 21, 2019