Ages & Stages: 11-18: Teach Your Teens About Investing
I remember an old “Leave It To Beaver” episode where Wally Cleaver wanted to invest some of his hard earned money into the stock market. His dad Ward Cleaver, being the voice of reason suggested he invest in the local utility company, but ne’er do-well pal Eddie Haskell had Wally’s attention, suggesting he invest in a rocket manufacturer called Jet Electro. After watching the Jet Electro stock soar for several days, Wally decided that Jet Electro was the way he should invest, against the wishes of his father. After all, the Jet Electro was soaring and the local utility company had barely budged. Days later, when Jet Electro collapsed and the stock price fell dramatically, Wally was crushed. Only later did he find out his wise father actually bought some of the dull and boring local utility company for Wally anyway, and this part of his investment was still intact.
Not all lessons on investing and the financial markets can be condensed into a thirty minute sitcom (filmed in black and white, no less) but I do believe it does set the tone for some very important fundamentals as you begin to teach your children about investing.
First, I believe an important foundation on investing revolves around a fundamental difference between speculating and investing. Investing takes time and patience, qualities children notoriously lack. Speculating, on the other hand can certainly prove to be exciting (and profitable, at times) but also can lead to a “Jet Electro” scenario that Wally Cleaver nearly experienced. I feel a sound understanding of both concepts is vital to any investor, especially a novice.
Stocks and Bonds
For starters, explain to your child what a stock is, and the differences between stocks and bonds. This may sound overly simple, but the concept eludes many adults, let alone children. Stocks represent ownership of a particular company. Bonds, on the other hand, represent an obligation of a company to pay a certain amount of money (interest) to the bond owner for a specific period of time, and then return your principal when the bond matures. Both contain risk, and either one can result in an investor earning OR losing money. Once these basics are digested, I believe you can make learning about investing both interesting and profitable.
If you, as a parent or grandparent, have the ability to do so, I suggest you open an investment account for your child, either as a UGMA (Uniform Gift to Minors) or as a 529 College savings account. Each has its own benefits and drawbacks, and which one may be more suitable will vary from family to family, but the emphasis here is to have an investment account with your child’s name on it. That way, your child is much more likely to take a personal interest, both in the account’s contents and performance. Set the account up where your child can view the account on line. Most brokerage firms and 529 plans offer this for free. In between internet surfing and emails why not have your child check on the performance of his or her college savings account? Review the monthly or quarterly account statements you receive in the mail with your child. There are also lots of software programs available where a child (or parent, for that matter) can set up a hypothetical portfolio of stocks and monitor how the investments would actually have performed should “real money” have been involved. This can be a wonderful learning tool should an actual investment account be impractical for your family at this time.
Include Your Child in Planning Meetings
If you have a relationship with a financial advisor, I suggest you may want to include your teenager in some of your meetings. Where appropriate, this could be a valuable learning experience as well. Chances are your sons and daughters will adopt an approach to finances very similar to the ones they see their parents employ. Set a positive example for them early. Your child’s first exposure to investing should not be the 401K enrollment kit they receive in their first job out of college. Help your children become knowledgeable about risk, reward, and diversification.
This is by no means an exhaustive approach to teaching your child about investing, but it will begin to sow the seeds that will hopefully lead your child towards successful investing. As sources for retirement income have shifted dramatically, placing more emphasis on the individual’s role as opposed to the employer’s role, successful investing becomes more and more important from generation to generation. I don’t believe it is ever too early to start. I will close by paraphrasing something a mentor of mine shared with me: Bill Gates is a successful businessman because he sold a lot of Microsoft software. Bill Gates is now a wealthy philanthropist because he owns a lot of Microsoft stock. Happy investing!
Evan Kluttz is a Certified Financial Planner and a Vice President of Sales with RM Stark & Co. in Charlotte. You can reach him at email@example.com.