Recently I had a conversation -- actually, more of a disagreement -- with my 25-year-old son about how to invest. Peter will be starting a new job soon, and I was emphasizing how important it is for him to contribute regularly to his 401(k) plan and, at his young age, tilt heavily toward stocks. Peter disagreed. With the market hitting record highs, he thinks there’s a good chance prices will fall. He argued that it would be smarter to bide his time and buy on a market dip. I pointed out that while that makes sense in theory -- at least for a portion of his money -- spotting the dip and making a move at precisely the right time has tripped up many an investor.
One thing that struck me about this discussion was that I was having it with my son. Who could have predicted when I started writing about kids and money, back when Peter was a toddler, that he and I would one day be debating the merits of dollar-cost averaging? But one thing I’ve learned in all those years is that teaching children about money is an ongoing process that occurs in small steps, when kids are ready to absorb the lessons.
When to start. I’m often asked at what age it’s appropriate to introduce kids to investing. My response: Don’t assume that buying stocks is for adults only, sort of like an R-rated movie. On the contrary -- it’s more like PG-13. Children who are that age or even younger are able to understand the basics of how the market works.
In my experience, kids who own stock are in the minority, but they’re a vocal and savvy group. They most likely fall into three categories:
--Kids who already have their own savings accounts and start to notice that at today’s paltry interest rates, their money isn’t growing.
--Kids whose parents -- or grandparents, other relatives or friends -- take an interest in the stock market.
--Entrepreneurial kids who have earned several hundred dollars or more at a job or business and have bigger plans for their money than keeping it in a bank account.
To encourage a youngster’s interest in investing, here’s what I’d recommend.
Keep things simple. Don’t try to snow kids with Wall Street jargon. Just explain that owning a share of stock is like owning a piece of a company whose goods they purchase or whose stores they patronize. Kids aren’t much interested in hearing terms such as diversification or market capitalization; they’re more likely to ask, “How can I buy a stock?” or “Who is this Dow Jones person?” See Three Ways to Teach Kids About Money
Give kids skin in the game. Buy them stock in a favorite company (or help them invest on their own) so they can follow news about the company and changes in its share price (see 17 Stocks Your Kids Will Love). One low-cost way to buy small amounts of stock is through Capital One’s ShareBuilder program, which has no minimums and charges $4 per trade if you sign up for the automatic investment plan. Or you can buy a single framed stock certificate in more than 100 companies from GiveAShare.com for the price of the stock, plus a $39 fee and the cost of a frame.
Be a mentor. Don’t be concerned that your children won’t listen to you. I was once asked to judge an essay contest in which high school students wrote about someone they considered to be a successful investor. I was blown away by how many of the teens cited family members: “One lesson I Iearned from my father is never to panic,” wrote one student. “With investing you must remember that you are in it for the long run.”
Include both your sons and your daughters. Surveys consistently show that women express less confidence about their ability to invest than men. Investing is a learned skill -- even for the likes of Warren Buffett -- so it’s important for parents (especially dads) to make lessons gender neutral. You may be rewarded (and pleasantly surprised) years later, when your grown daughter tells you, as mine did recently, that she had spent a weekend going through a tutorial on employee stock purchase plans on the E*Trade Web site, and then signed up for her company’s plan.
Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.