Kids learn by watching adults. Talks are nice, but your actions as an adult are what really matters. Seeing you exercise regularly teaches them the value of fitness. Likewise, your habits can influence theirs.
My parents modeled smart financial choices during the inflation-laden and tough 1970s. Mom used a calculator to manage her Stop and Shop grocery store budget. With oil prices soaring then, we kept the thermostat low to save energy, even during the cold Massachusetts winters. These early lessons taught me a valuable principle: Control what you can control. This is what we financial professionals advise for our clients during periods of economic uncertainty.
Dad sparked my interest in investing when I was in my early teens by showing me mutual fund prices in the Sunday paper. He explained how these investments are diversified exposure to many companies (stocks) and that these companies should gain in value as the economy grows. After my bar mitzvah at age 13 and on my father’s advice, I split the generous gifts from friends and family, with half going into savings and the other half into stock mutual funds.
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After graduating from college at the age of 20, with my first real job in hand I invested $2,000 into my first IRA. I decided to diversify into four stock mutual funds by doing investment research using magazines like Forbes and U.S. News & World Report, which Dad had subscribed to for decades. My goal was to diversify with different investments and let my hard-earned salary grow for the long term.
Learning how to pick stocks
In 1993, a few years after graduating college, I encountered my first Starbucks while walking through an airport on a business trip.
From the book One Up on Wall Street, I learned about legendary mutual fund investor Peter Lynch’s approach to stock picking. “Invest in what you know,” he wrote. Analyze a company’s opportunity based on your own experience. If you like something, other people will probably buy and use the same services you value.
Peter Lynch's "invest in what you know" philosophy resonated. Starbucks, with its European-style coffee experience, seemed like a winner. Their national expansion was just beginning, so I invested a few thousand dollars before the company began on its multidecade plan to have stores just about everywhere.
While the stock has appreciated multifold since the early 1990s, I sold too early and for a quick profit. I was young and impulsive and wanted to find the next winner. Instead of being patient, I missed out on what would have some incredible investment gains. Now, I teach my children a different approach.
Creating a framework of intentionality
When my kids were young, we started a family investment project. We opened brokerage accounts for each child and then discussed what companies' products or services they liked and used. Again, the goal was to create a connection between personal consumption of quality goods and services and company growth. After many discussions, we agreed upon a diverse mix of companies with different industry and sector representation.
We invested in 10 stocks: Domino's (DPZ), Starbucks (SBUX), Mastercard (MA), Amazon (AMZN), Chewy (CHWY), Microsoft (MSFT), Sony (SONY), Ulta Beauty (ULTA), Apple (AAPL) and Facebook (META).
To make it real, we invested $1,000 in each child’s brokerage account, understanding that we would split the gains after a three-year holding period. We also used an engaging investment app to teach them about diversification and stock selection.
We created investment theses for each company, explaining why we thought they would succeed and checked how our portfolio was performing a couple of times a year. And throughout the experiment, knowing we had these holdings gave us a chance to talk about things like how Sony’s latest PlayStation release affected the stock price. When the three years were up, we evaluated our holdings together. We talked about why we thought some of our picks had worked out and others hadn’t. This hands-on approach helped my children understand the stock market while building their financial knowledge.
Gambling vs investing
Real-world investing is better than classroom competitions. In school, competitions often focus on short-term gains and can mislead students into thinking investing is like gambling. Stock prices can fluctuate wildly, not always reflecting a company's true value.
It's important to teach kids that stock prices follow fundamentals over time. Economic events can temporarily affect prices, but a company's long-term success depends on its performance.
Our family investment project was a hands-on learning experience. We reviewed our portfolio regularly and discussed how news events affected our stocks. This helped my children understand the principles of investing.
Educating future investors: How to get started
Start a family investment project:
- Choose a platform: Research and select an investment platform suitable for minors.
- Set up a custodial account: Create a custodial account for your child to manage their investments.
- Set expectations: Discuss long-term investing goals and avoid short-term speculation.
- Keep it simple: Let your children choose six to10 companies they're interested in.
- Create investment theses: Have them explain their reasoning for selecting each stock.
- Diversify: Guide them to choose companies in different sectors for a balanced portfolio.
- Discuss investments: Talk about your holdings and how news affects them.
- Review and adjust: Evaluate your portfolio regularly and discuss future plans.
Conclusion
Don't get discouraged. Some children just won’t be interested in investing at a young age. Ultimately, though, your children will mirror your examples of saving and spending.
Investing can be a fun and educational experience for families. It helps children understand how businesses work and can teach them important financial skills. With the right tools and support, you can empower the next generation to become savvy investors. Supporting your child's financial education is a long-term goal.
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