Five tips to introduce your teens to investing.
- Connect the world of investing to real life.
- Make the world your classroom.
- Help teens take advantage of the magic of compounding.
If you have teens, whether you try to or not, you give them personal finance lessons every day. And you have been for years. From basics like earning, saving, budgeting, borrowing, and spending, to how to give back through the charitable causes you love, your teen has been paying close attention to everything you do—including how money is managed at home. And believe me, what they learn from you will help set the foundation for their relationship with money for their lives.
One financial topic that's not often discussed at home, let alone taught, is personal investing. Given its exponential growth over the past few years, it's wise to teach your teen the basics of investing—so they get the facts from you and not some version of the facts from their friends.
No matter who you are, when you're first learning, investing can seem overly complicated. The lingo alone is enough to make any newbie run for cover. But if your teen is interested, it's worth your effort. Because teens have what you and I don't—the gift of time. With many years ahead to invest, they can harness the power of compounding potential to help their savings grow and build a strong financial foundation for all their life goals. Here are some tips to help teach healthy investing habits.
Tip #1: Teach teens the basics of investing
Help them understand investing terminology and concepts. Start by breaking complicated words and topics down into simple terms. For instance: A bond is just a loan that you, the investor, make to a company, a government, or government-sponsored entity. And in exchange for loaning your money out, the borrower will pay you interest over time until the bond matures, which is just the date when you get the principal you invested back too.
A stock is also not complicated when you break it down. When a company wants to raise money, it can sell pieces of itself as shares of stock. If you buy a share, you're a shareholder—and part owner of the company.
There are also various funds that any investor should know about. When you buy a share of a mutual fund, your money is pooled together with other people's money to buy a collection of stocks, bonds, and other securities. Similarly, a share of an exchange-traded fund, or ETF, represents a variety of different investments. Each of these fund types has its own nuances, which you should familiarize your teen with as they continue to learn.
No matter what you invest in, the intention is to make money. But, as in life, there are no guarantees. You are taking a risk for the opportunity of making more than what you started with. Teaching your teen the fundamentals of investing shouldn't stop at definitions. They need to know about asset allocation, risk tolerance, and diversification, and so much more.
Tip #2: Start with companies your teens know
Challenge teens to design a portfolio, or collection, of companies they know. Ask them questions like: What clothes or shoes do you wear? What are your favorite tech devices? What streaming services do you use?
They can also explore the habits of other consumers. Ask them: Where do people go for entertainment? What foods do lots of people eat? Encourage your teens to look at trends that create demand for new products like the move toward exercise, healthy eating, and cars that pollute less. Ask your teen to think about how these consumer desires can affect investing opportunities now and in the future.
Tip #3: Stress the importance of diversification
Ask your teen what they think about the old expression, "Don't put all of your eggs in one basket." You want them to understand that diversifying their investments by buying many different stocks can help guard against "losing your eggs" if all your money is in one stock that goes down in value. Not only is it smart to diversify the different types of investments—for instance, stocks, bonds, and funds, it's also important to diversify the types of companies, industries, and the size of the businesses you invest in. And while diversification does not ensure a profit or protect from loss, it can help you balance your risk and reward.
Tip #4: Teach teens the benefits of a "buy and hold" strategy
It's sometimes easy for teens to think that investing in stocks that are a click away is like playing a video game. Investing is not a game—it involves real money and real risks. In the short term, markets go up and down, often unpredictably. In the longer term, however, the stock market has historically moved upward. So regular investing in quality stocks and holding them for years, not days, has been a good strategy for many investors. Of course, it's important to be transparent with your teen and explain that there are no guarantees in life, and this goes for the world of investing as well.
Tip #5: Teach patience: Show teens how compounding works over time
Albert Einstein said that compound interest is "the most powerful force in the universe." Our kids have time on their side, and thus the ability to invest over many years. Encourage your teens to find an interest calculator online and see what regular investing at reasonable returns can yield. There's even a simple formula, called the Rule of 72, that can help you figure out how long it would take to double your money at a specific interest rate. The formula is 72/Interest Rate = Years. For example: Let's say that an investment is yielding 7%. You take 72 and divide it by 7 and it shows that the money will double in 10.28 years.
Make it real
To help solidify the basics of investing, try giving your teen some companies and industries to watch and research. Help them make sense of what they discover along the way. If you're comfortable doing so, think about letting your teen tag along with you as you monitor your own investments. Don't forget to explain what you've learned—especially from the mistakes you've made along the way.
The journey of helping a teen learn the ins and outs of investing can be fun and rewarding. However, it's important to always stress that there are risks and they can lose money. But starting an investing education and journey early is something that could pay off for years and years to come. Remember the words of Benjamin Franklin: "An investment in knowledge pays the best interest."
Bonus tip: Keep it interesting
Here's some historical trivia to keep the investing discussion fun.
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 $3,575,000.¹
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.²