How to Teach Children to Become Smart Investors
According to a Gallup survey, only 31% of U.S. adults between ages 18 and 29 have invested in the stock market between 2009 and 2017, which is 11% less than in the previous eight years. That lack of activity can become a potential source of regret as people grow older. Many stock market investors wish they had begun investing much earlier.
According to a Gallup survey, only 31% of U.S. adults between ages 18 and 29 have invested in the stock market between 2009 and 2017, which is 11% less than in the previous eight years.
But how early is too early? Should you wait until your kids turn into young adults and become smart investors before starting their own portfolios?
Perhaps not, says Neale Godfrey, a weekly Forbes and Huffington Post contributor and author of 27 books, who has done pioneering work on the topic of “kids and money.”
Teach Kids the Basic Concepts
“Stock is easy to explain. If you start a company, you probably need money. You can either borrow it or convince people to be your partner,” says Godfrey. “The company will sell you a little part of their company, called stock. As the company keeps growing, it will need more money.”
Explaining a bond “is equally easy,” Godfrey says. “When a company or government borrows money from the investor, that debt is called a ‘bond,’ not a ‘loan.’ Then the company (or government) repays it with interest.”
Bonds yield lower returns than stocks, in exchange for which they are often safer; smart investors should consider including bonds to build a healthy, balanced portfolio.
Ask Kids to List the Companies They Know
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It’s a fact: When you don’t know anything about investments as a topic, it’s really boring. Even when you do, it can still be boring. And boring is never good for kids. Boring is the opposite of what you want when you’re attempting to convince your kid to try a new thing. So, play a little game — ask them to write a list of 10–15 companies they know and at least 5–10 that they like.
“If they are excited about their new iPhone, it’s a great time to introduce them to Apple stock,” suggests Godfrey. “If they are sucking up frappuccinos, they can look at Starbucks stock; if you took that trip to Disney World or saw Star Wars, they may be keen on their stock, etc.”
Kids Know What They Like — Start There
“Your kids don’t have to be the ‘Wolf of Wall Street’ to pick the right stocks,” says Godfrey. “They are savvy consumers; they know what digital devices they use, the companies they rely upon to buy and deliver their every whim, and who makes their favorite lattes.”
Next, you might want to explain the need to diversify one’s portfolio without getting into some truly boring details.
Explain a Diversified Portfolio
Take the opportunity to explain to your kids that “cool” companies alone won’t cut it. Touch on the virtues of a well-diversified portfolio, which can work wonders for their future financial well-being with very little input of their own.
“Use simple terms and don’t overcomplicate things,” says Godfrey. “Tell them that if you don’t diversify, you run the risk of the proverbial ‘putting all your eggs in one basket.’ Invest in different companies — in sectors you believe in — and make sure you spread your risk.”
You Can Start Them With $100
So long as it’s a parent making investments on behalf of the kids, there is no need to wait until they grow up. And you don’t need to invest big bucks either, as some investment accounts will let you get started with $100. Remember, you’re not trying to make your kids rich at an early age — you merely want to make the topic of investments interesting and help them develop good investment habits.
Betterment is a so-called robo-advisor that builds your portfolio by asking you a series of questions designed to understand your risk tolerance. Another option is Acorns, which takes an interesting approach to investments: It will round up the change on your purchases and invest it on your behalf.
Remember that maintaining an investment portfolio is never free, so choose your advisor or robo-advisor wisely. “Any fee, including a management fee,” says NerdWallet, “reduces your return. If you’re earning a 7% annual return on your portfolio, and you’re paying a 0.25% annual management fee, your return is effectively 6.75%. Even small fees add up over time.”
You do have choices, and your kids don’t need to wait until they’re gainfully employed to begin investing.
Explain Compound Interest
Now might be the time to go further. How do you turn your small initial investment into some serious money? Just do what all smart investors do: Add more funds regularly as time marches on and let compound interest take care of the rest.
If you think that the concept of compound interest is too challenging for your kid’s attention span, think again. The Balance suggests teaching “kids how compound interest works by the ‘Rule of 72.’ According to this rule, money doubles at a rate where 72 is divided by the percentage gain.” If you are receiving 4% interest on your money each year, it will double in 18 years (72/4).
Things Don’t Always Go Your Way
It’s inevitable that you will lose money on some positions sometimes. If your kids get frustrated that the companies they pick don’t always perform to their expectations, they can develop a deep distrust of the system and a reluctance to stay the course. That’s why it’s very important to explain to kids that smart investors accept the risks and don’t panic every time they hear bad news on TV or from their peers.
“The lesson is to start a regular investing program and to step away from the media that can panic them into selling as the investments lose value and buying when they climb,” cautions Godfrey. “Also, it’s great to get restaurant tips from your friends, but stock tips — not so much.”
And Then, There Are Index Funds
The chances are they know Warren Buffett, even if they have never thought about investments. They watch enough TV to know he is a very smart man. So just tell them that Warren Buffett said this: “My advice…could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund (I suggest Vanguard’s).”
With all the recent technological advancements, there’s never been a better chance to begin an investment program for your kids and keep it simple enough to sustain their interest. Start your kids’ portfolio, and it might be one of the greatest gifts you ever give.
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