It’s never too early to start educating your children on investing. From their younger vantage point, kids have their own set of investment advantages. This week’s article lays out an easy hands-on process to get kids thinking about investing (versus spending) and help them prepare for the day when they manage their own finances. Here’s how you can start:
Walking Leading Indicators
One of the most effective ways to introduce and hone best investment practice with your children is to orient the subject matter towards what interests them. Make it relevant to their worlds. Your kids have far more exposure to emerging products and trends than you do. They are the target audience for billions of dollars of marketing budgets, from apps to apparel. The cultural references that end up grabbing their attention are often the beginnings of real business success stories. Today’s video games, YouTube stars, Instagrammers, athletes, movies and clothing are all integrated into a complex web of marketing tactics. If your kids develop a particular interest in Apple products, Nike sneakers, Snapchat, or cryptocurrencies, take notice as it could be the first sign of an investment opportunity.
Ask your kids what brands they think are going to do well and which ones are falling out of favor. Help them figure out if those brands are something you can invest in. It’s tough to invest directly in Fortnite, for example. They may not always pick winners, but there are valuable lessons to be learned when stocks decline too.
Add a professional layer
Your kids don’t have the experience to know how to size an investment, how to be patient through the ups and downs of the market or how to evaluate a business model or capital structure. This is where you can add a professional layer to the process:
- Set up the account: I prefer using a traditional brokerage like Fidelity or Schwab because it has market and limit orders and a more professional interface. Robinhood via its mobile app is fine, too.
- Invest $1000 per idea: A thousand dollars is a lot of money for a young person. It’s large enough where the long-term gains are meaningful but also small enough where the daily swings in dollar value are comparable to the prices of things they tend to spend money on.
- Set a timeline: Investing for the long term is an ideal habit to practice and preach. Set a minimum amount of time to hold the investments. Hold long enough to ride out short-term market swings and let the investment realize its potential. 30 days minimum and up to three years is reasonable. 3 years is a good way to demonstrate how investing can be boring, too.
- Start with stocks: Invest in single stocks first and eventually transfer gains to diversified ETFs. Learning to diversify is a key element of this process. As the maxim goes, “You get rich through concentration and stay rich through diversification.”
- Discuss when to sell: Decide together which portion you will sell when you to take profits off the table. Do you decide to sell the whole thing, fifty percent, only the profits or the value of the original investment (cost basis)?
- Track your progress: It’s easy to track the performance of a single investment in a single stock by watching the price go up and down via google. Tracking performance through contributions, withdrawals, buys, sells, dividends and interest payments is more complex. Leverage our OsbonCapital.com Client Software to get this done.
If you’re looking for teachable investment moments with your kids, this interactive method is a good place to start. I would suggest keeping a written log of your decisions so you don’t forget what was said and why. John and I did this when I was in middle school when all the kids were begging their parents to buy Abercrombie and Fitch t-shirts. It definitely got me interested in investing, which grew into a passion and eventually into a career. If you’d like more tips on getting your kids started, just let us know.