Are you teaching your children about investing? As they become aware of money and other financial concepts, it is smart to familiarize them with investing and arm them with know-how and tools they can take with them into adult life.
Children mature at different rates, of course, so it may be a while before they’re ready to tackle concepts such as portfolio creation and asset allocation. However, the basics of investing can be taught when kids are quite young.
Long before your kids start checking company profiles on the internet, you can explain the relationship between risk and reward. To illustrate these concepts, let’s sketch a brief picture of two common investments: stocks and bonds.
- Gradually familiarizing your child with how markets work will demystify the process of investing, making it feel more accessible to them when they’re older.
- Start by teaching them the basics of risk vs. reward, stocks and bonds, profits and losses.
- If you own stocks, explain why you chose to invest in those companies; have them join you in keeping an eye on the stock price and company news.
- Once your child feels comfortable enough with the concepts, let them pick out a stock of a company they know or like. If you can afford to buy a few shares, then do so; if not, help them set up a model portfolio.
- When your child is older, encourage them to invest money they’ve saved in a mix of stocks, bonds, and a savings account; you can help manage their portfolio while still allowing them to take the lead.
- If your child knows about GameStop, use it as a teachable moment.
Discuss Stocks and Bonds
Introduce the idea that—in contrast to the savings account your child may already have—stocks are a variable-risk, variable-return investment. On the whole, stocks are classified as high risk, but along with that comes the potential for high returns. Explain that a stock’s value can go up and down, depending on the growth and profitability of the company. Also make it clear that risk in stocks can’t always be predicted—for instance, when corporate records are tampered with or CEOs lie. However, these events are outliers. Overall, the stock market has risen consistently in the last hundred years, offering healthy returns.
A bond is a low-risk, low-return investment, one type of debt security. Typically, bonds pay a small amount over the prime interest rate and are backed by stable institutions (usually banks or governments). You can buy lower-rated bonds that offer better returns, but they can default, and you can’t necessarily count on getting the income when expected. Given the complexity of these instruments, you may wish to start your child with stocks and explain that bonds become more important later in life.
Keep Your Child’s Attention
If you own stocks, start by showing your child what you own. Brand-name companies might get their attention—plane manufacturers such as Boeing, sports gear specialists such as Nike, technology companies such as Apple. Look at each company’s investor relations page together to learn more about what the company makes, how much it earned that year, and how many people work there. Then ask your child what company they would like to buy. Kids often have favorites even if they are not aware of them. Facebook and Disney, for example, are likely to be popular with most children.
Once you have introduced your kids to basic concepts, sit down and let them select a company. If you have the money, buy a few shares in the stock and then check the investment together at least once a week to show how it can rise or fall. You can also make a model online portfolio and track stocks for fun, without the expense of purchasing shares.
If you pick stocks with your children when they are young, they’ll experience how markets have up-and-down cycles; this will prepare them for the reality of market fluctuations and help them make informed decisions when they grow up.
Let Your Child Invest
When your child is older, you can provide a more in-depth explanation of stocks and other investments. Eventually, you want to let a child buy their own stocks. They may have enough cash diligently saved up in a savings account by the time they are interested in investing. Don’t put it all into bonds or the stock market; instead, invest a third in each and keep a third in savings. This will allow your child to compare the returns of different types of investments.
You have two options if your child doesn’t have money to participate in the learning process. You can use your own cash to open a small brokerage account where your child to make investments, or you can build a model portfolio of stocks that your child wants to buy someday. In the latter case, with no funds actually at stake, you will need to find innovative ways to maintain their interest.
There are several ways to open a brokerage account for a minor. Check with a tax expert for the best option before you start. Another thing to decide is whether you want to introduce your child to investing through one of the many online brokers—here are some that we think are especially good for beginners. Depending on the rules of the firm, an adult may be able to open a custodial brokerage account in the name of a minor and give that minor the right to trade in it online. The adult would remain the official custodian.
A Word About GameStop
Some more sophisticated kids may have already become aware of investing—if not obsessed with it—due to winter 2021's heavy trading in GameStop Corp. Enough kids got interested in stocks through hearing about it on YouTube and from friends, The Washington Post reported in early February, that parents were using it as a teaching moment. One 10-year-old who got $60 of GameStop for Kwaanza saw it grow to $3,200 before selling it in time.
At one point the videogame retailer lost 70% of its value in two days. But walking through what happened and why is a good way to make the excitement and risks of investing come alive for young investors.
The Bottom Line
It’s important to allow your child to make real decisions and take real risks. Money may be lost—one hopes, not on GameStop—but the purpose of the exercise is to familiarize them with investing, and part of that is learning that investments have advantages and disadvantages. Whatever the outcome, the experience of following their investments and gaining and losing money—whether actual or theoretical—will be invaluable.