How to help teens understand investing, part II
There are many benefits to investing early
Many people are under the impression that you have to wait until later in life to invest, but there are many benefits to starting early.
Parents who encourage their teens to start investing early on in life can help them get a head start on retirement and instill good financial practices.
Teens have many years ahead of them to invest and if they do so early, they have the potential to build a strong financial foundation to achieve their future goals. Here are some helpful tips to teach your teens about the basics of investing.
Follow the stock market
One way you can teach your teens about investing is by showing them your own stocks, if you have them, and talking about what companies you are investing in and showing how they have done over the course of several years. Then ask your teen what company they would like to invest in—many end up selecting companies they are familiar with like Apple or Amazon. From there, you can either purchase a few shares or follow the stock every day together for a few weeks, so that your teen can experience how markets have up-and-down cycles and understand the risks and rewards.
Have a healthy mix
Remember the saying, “don’t put all of your eggs in one basket,” well the same goes for the stock market. It’s important to teach your child that you should be investing in a collection of financial investments like stocks, bonds, commodities, cash and exchange traded funds (ETFs) instead of just one individually. It’s also a good idea to be diverse in the companies, industries and size of businesses you invest in.
This is called the portfolio theory, an investment strategy that works to minimize market risk while maximizing returns through diversification.
This means you are spreading your money out across different investments to manage risk and reduce the volatility in the overall marketplace.
For example, if you own a piece of five companies and one doesn’t do well, you have four others working in your favor and your overall wealth doesn’t fall with the one stock. This shows why a diverse portfolio is essential to your overall financial health.
One of the most interesting parts to investing is how money grows over the years, and that the longer you invest, the more money you gain.
Teaching your kids patience and to look for long-term rewards instead of instant gratification is a great lesson.
It’s also imperative to understand that market volatility is normal and to remember to look at the long-term return on investments rather than the short-term gain. This will teach kids to observe how your investments do over time and adjust as they go.
Consider a custodial account
Once your teen has a grasp on how to invest, consider allowing them to have an account where they can see how investing works firsthand.
A custodial account is a financial account that is set up for minors and allows them the opportunity to save, while still retaining full control over the account until they are an adult. This account can give your teen the opportunity to learn some basic investing skills. Sit down with your teen before you open the account to set financial goals and discuss investment choices.
Every month be sure to go over account statements, your investment mix and discuss what happened and why, did the account grow or were there some losses? This can be a great learning opportunity while also creating future investments.
It’s never too early to teach your children about money and investing. By introducing your teen to basic investing strategies early, it can help them lay a strong financial foundation that will last into adulthood.
If you’re interested in learning about investing tips for teens and kids, check out this article.
Abby Wendel is the president of consumer banking at UMB Bank.