For many of us, investing was not a part of our core educational curriculum as we grew up. Financial lessons often are learned in the home or through experience when we move out on our own. At Centered Financial, we believe that financial education is an essential need to improve our communities, nation, and world. If you have young children or teens, you can make a huge impact in their life by having regular conversations about money and finances. Here are 3 things that you can teach your kids about the basics of investing.
1: Investing is about ownership
It’s important to establish the “why” first. Why should we invest? Why should anyone be interested in it? What’s in it for them. I have found that small conversations about ownership are helpful. In the home this conversation can be about something that is familiar. As I grew up, I knew that my Dad was self-employed. The concept of being a business owner became familiar to me and I was able to see some of the benefits of being an owner when I got to visit his shop as a child. Small conversations about the benefits of being an owner or a boss are helpful to start out, then the conversation can translate easily to investing.
When we invest in companies, we become partial owners of these companies. This allows us to participate in the value or fortune of the company. Over time, our value can grow or pay us income that we can use to buy things or buy other investments.
There is a powerful quote from the book, The Richest Man of Babylon by George S. Clason. It reads, “Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.”
I like relating this quote to investing in any business.
2: Start with companies your kids know
This is a great way to start a conversation about investing. It begins with talking about what activities, products, or services they like or use every day. What do they like about these companies? Do their friends like the same things? How many people do they think are using the same products, etc. This helps kids see the value that a company provides.
Earlier this year, you may remember that I challenged my kids to an investing competition. Each of my children got to pick 3 companies to invest in. As we started the competition, I pulled up a list of the largest 150 companies on the stock market and I let each one of them look through the list. We talked about what some of the companies do and I asked them to think about things that they are interested in to decide what companies they might want to invest in. We started this in March of this year, so it is still very early but here are the results so far:
My daughter was interested in entertainment. She thought about the services that she uses everyday as she is online doing schoolwork, chilling out or interacting with her friends. Her picks were:
So far, her portfolio has a 6.01% gain.
My middle son loves sports and also loves gaming. He picked:
His portfolio has a 10.08% gain so far.
Lastly, my youngest son did some research on famous investors. He decided he wanted to invest in Warren Buffet’s company. So his portfolio looks like this:
His gain so far is 7.86%
Keep in mind that with fractional shares, investing in companies like these does not require a lot of money. The kids are learning how investing works. They are having fun with the competition, and they are learning some important lessons. Especially, when after the first few weeks of investing they were all in the hole. This brings me to the 3rd thing to teach your kids about investing.
3: Investing requires patience
With regard to my kid’s investing competition, it is easy for them to feel like this is a game. However, investing involves real money and real risks. When we are losing money, it can feel like we should sell our investment. However, if we have invested in a quality company, sometimes we just have to have patience. Remember the quote from The Richest Many in Babylon. Trees don’t grow overnight. In the market, we have some statistics on our side. Over the past 91 years ending in 2018 the stock market is positive 73% of the time if we are looking at 1-year periods and if we look at 10-year periods, the stock market is up 94% of the time. [1]
Buying and holding quality companies can help us build wealth if we are in it for the long-term.
Bonus lessons to reinforce the first 3
Teach about compound interest. It is said the Albert Einstein called compound interest, “the most powerful force in the universe.” This concept is important for kids because time is on their side. Here is a cool compound interest calculator to see how money adds up over time.
The rule of 72. This rule helps kids learn how long it will take for their money to double with a certain interest rate. The formula is 72/Interest Rate = Years. For example: Let's say that an investment is yielding 10%. You take 72 and divide it by 10 and it shows that the money will double in 7.2 years.
Fun Facts to make you sound like an investing pro! [2]
Wall Street
Did you know that the concept of a stock market exchange in the U.S. started over 400 years ago on the dirt road in lower Manhattan we now call Wall Street? People came together to trade goods. Others made it difficult to trade, so a wall was constructed to keep them out. Hence the name: Wall Street.
Trading used to take place outside, even in foul weather. So traders bought a building they could trade in. And that's how the New York Stock Exchange (NYSE) was founded.
Back in the early days, you had to buy a chair, called a "seat" on the stock exchange in order to trade. In 1817, a seat cost $25. By 2005, the most expensive seat sold for $3,575,000. [3]
Bull and bear
You probably know that a bull market is a term that represents a market where prices of stock are rising and a bear market is a term for a falling market. But do you know where the terms came from? Lore says it's because a bear fights by using his paws in a downward motion, and a bull fights by moving his horns in an upward fashion. [4]
Need some help with the conversation? Schedule a session today to discuss investing for kids or yourself.
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.
[1] https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html
[2] https://institutional.fidelity.com/app/item/RD_9895514.html
[3] Will Kenton, "Seat," Investopedia, December 25, 2020, https://www.investopedia.com/terms/s/seat.asp
[4] Mary Hall, "Where Did the Bull and Bear Market Get their Names?" Investopedia, January 21, 2021, https://www.investopedia.com/ask/answers/bull-bear-market-names/