When groups concerned with financial literacy try to improve the next generations’ interest in investing, the conversation inevitably turns to the stock market game. You’ve seen it: Make your stock picks for the coming year, then check in periodically to report progress. CNBC does it, high school and college classes do it, financial services companies do it.
I see two fatal flaws of the stock market game as a teaching tool:
It doesn’t teach finding good stocks at good prices. Stock prices can take a few years, even more, to reflect the quality of the underlying companies. Meanwhile, even poor-quality stocks can have a great year.
It doesn’t use real money.
Nothing teaches like real-life experience. If you’re on a baseball team and all you do is practice, I doubt you’ll learn as much as you would by transferring lessons to games. When you’re making decisions with real money, it’s a true test of your conviction to follow good practices.
For the kids in your house, a great way to get them involved with investing is by jumping into the deep end and buying stocks together. Talk about the qualities of good stocks—well-managed, growing sales and earnings at rates higher than normal for companies their size—and the importance of paying reasonable prices for them.
There’s always a question of whether it’s appropriate to buy more conservative or riskier, higher-growth stocks for youngsters. On the one hand, conservative stocks might earn more predictable, but unspectacular, returns over the years. By reinvesting the dividends, investing regularly in these stocks, and being patient, there’s a chance to build significant values over the years and teach your children about the miracle of compound interest.
On the other hand, that’s boring. Kids are probably much more interested in buying stocks of companies that are top of mind because they’re using their goods and services. New companies that offer trendy products and experiences are especially interesting to younger investors. They likely would suggest buying stocks in some of these companies even though they’re unproven and overpriced. Others might be well-managed, high-growth companies. In these situations, you can impart the idea of risk vs. return. Since their investment runway is still long, they can easily overcome mistakes in stock-picking.
My feeling is that all these lessons are important to learn. So with your guidance, let them take ownership of the experience and make some of the decisions. And here’s the thing: Make it their money that’s being invested so they have skin in the game.
If they’re under 18, you’ll need to open a custodial brokerage account for them. That’s the sort of service we or your financial advisor can help with.
Since the days of living off a pension are mostly over and the younger generations are expected to fund their own retirement, knowledge about financial planning is more important than ever. It’s one of the most valuable things you can pass on to your kids. Giving your kids real-life experience in investing will pay dividends for decades.