Over the last several years, I’ve been doing a lot of thinking about teaching kids how to invest. There is so much potential good that could come about by getting kids started with investing as soon as possible. In a practical sense, they have an abundance of one of the most important ingredients for compounding returns. They have time. A little bit invested now could turn into a lot down the road.
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 our kids are involved. And what great benefits we’ve already seen!
When our daughter was just nine, I remember looking at an investment web site together. She noticed that the price of a stock she was looking at kept changing, and that led to a great conversation about how frequently stock prices change. And that 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 understand even seemingly complicated concepts 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 invested at age 18 could turn into over $1 million by the time you’re 70, even if you never add another penny to the account!”), 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 $1 million certainly would be great wealth, it’s also merely a reasonable nest egg that would help them provide for their families in their later years. Seen from that perspective, it’s good stewardship to encourage our kids to begin investing when they’re young.
What’s especially exciting to me — and what hopefully gets conveyed to our kids — is the freedom that would come from having such a great head start on retirement even before they finish high school. It could remove what is often a huge struggle for people: saving enough for their later years. And it could free them to invest for other purposes, such as buying a house, starting a business, or investing for any number of other worthy goals.
3 – Kids could mistakenly think stock market returns are guaranteed
I’ve told our kids many times that an 11%+ average annual return (the assumed return baked into the example of $3,000 at age 18 turning into more than $1 million at age 70) is only that—an assumption. It is certainly not guaranteed. And I’ve told them the stock market 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. It’s been helpful to be alongside them through some ups and downs in the 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 an early age?
For more on teaching your kids about investing and all aspects of money management, pick up a copy of my new book, Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management.
I taught my high school students all of the risks in the market. I also had them play the Stock Market Game where they learned in real time what can happen to stocks depending on the news on that stock and/or the country/world, etc. They learned valuable lessons. I think teaching kids who are ready to learn, not be forced to, can be a GREAT thing for their future. Explanations of what a stock is and how the prices are affected are also a must. Have them read articles.