I’ve been doing a lot of thinking (and writing!) lately about teaching kids how to invest. In a couple of recent posts (here and here), I’ve demonstrated the incredible potential of getting kids started with investing as soon as possible.
While there is a lot of potential, I realize there are also some mistakes that could be made along the way. Here are three of them.
1 – Parents could be tempted to make all the decisions and do all the work
There’s a decent amount of research indicating that what little is happening in the way of teaching kids about money in schools hasn’t been all that effective. The key take-away is that it hasn’t been done in a very practical way. The kids are listening to too many lectures. They haven’t had enough hands-on experience.
That’s a good lesson for parents to be aware of. If I do all the work of investing for our kids, they won’t learn. So, I’m forcing myself to resist the temptation to charge ahead and just get things done. I’m making sure they’re very involved. And what great benefits we’ve already seen!
Recently, our nine-year-old was on an investment web site and she noticed that the price of a stock she was looking at kept changing. That led to a great conversation about how frequently stock prices change, which led to a surprisingly in-depth conversation about the different ways to buy stocks (and ETFs, such as with a market order or limit order. (I’m constantly reminded that kids can grasp things much earlier than we may assume).
2 – Kids could be tempted to think investing is all about getting rich
With all my talk about the potential of getting started with investing early (“$3,000 at age 16 could turn into over $14 million by the time you’re 70!”), I realize there’s a danger that our kids could see this as only about getting rich. The last thing we want to do is to raise rich young rulers.
While $14 million (about $3.5 million in today’s dollars) certainly would be great wealth, it’s a reasonable nest egg that would enable them to provide for their families in their later years. Seen from that perspective, it’s just good stewardship. What excites me — and what hopefully gets conveyed to our kids — is the freedom that would come from having retirement mostly handled before they finish high school. It could remove what is often a big struggle for people: Saving enough for their later years. And it could free them to use other investments to buy a house, start a business, be especially generous, or any number of other worthy goals.
3 – Kids could mistakenly think stock market returns are guaranteed
I’ve told our kids many times that the 17% average annual return we’ve assumed in their plan is only that—an assumption, and a very aggressive one at that. It is certainly not guaranteed. And I’ve told them the strategy they’re planning to follow has experienced some significant downturns. But it’s one thing to hear such things; it’s something very different to experience them.
This is one reason I’m glad they’re starting their investing journeys while they’re still under our roof. I want to be alongside them through a painful bear market.
Hopefully it’ll help toughen them up and prepare them for their lives as investors. As we like to say at Sound Mind Investing, one of the greatest investment risks is the risk of getting in your own way. Usually, that means selling out of fear. You have to live through a few downturns to learn how to not panic, and to build the internal fortitude to hang in there.
So, as we take the next steps with our kids, these are some of the key mistakes we’re trying to avoid.
What are some other dangers you see in helping kids start investing at such an early age? Next week, some final (for now) thoughts on helping kids with investing — what it’s really all about.