By David Wolpe (TMFDbunk@aol.com)
November 12, 1997
All lovely things will have an ending,
All lovely things will fade and die;
And youth, that's now so bravely spending,
Will beg a penny by and by.
-- Conrad Aiken
For God's sake, give me the young man who has brains enough to make a [F]ool of himself.
-- Robert Louis Stevenson
In order to avoid the (admittedly mangled, out of context) consequences of the first of the above quotes, it is our solemn mission to teach the second.
We've seen in previous weeks that, developmentally speaking, there are ways to prepare children for that time when they're able to take their investing future into their own hands. Is that time the teen years? Are teenagers ready to take the reins of their financial future?
In terms of intellectual development, the answer is "Yes." In junior high and high school, algebra is taught, along with geometry, calculus, physics, chemistry, biology, economics and a number of other subjects that are at least as complex as the principles of investing. High school students clearly have the capacity to learn about simple and compound interest and have well-developed abstraction skills.
If you say to a 15 year-old, "If you invest $100 now, just once, in something that earns 20% a year, then when you're 65 years old you'll have $910,044," you're likely to get a stare of disbelief. It isn't because she is incapable of understanding such a big number; it's because she can't believe that a single investment of $100 could ever grow to such a large sum. In addition, she may or may not have a good idea of what $910,000 can buy.
Such is the miracle of compound interest, though, that the above calculation is absolutely correct. Does this mean, then, that the average high school student is ready to begin investing?
Not without your help.
The Trouble With Immortality
The trouble with immortality, as it exists in the mind of, say, a 16-year-old boy, is that it does not allow for a great deal of thought about the future. After all, why worry? There's plenty of time -- aging is something that happens to people far out on the horizon. Though there is infinite time in the vague future, there is, ironically, little time in the immediate present for boring words about index funds or the Dow, or even high-tech growth stocks.
There are two ways to impress upon children the value of long-term investing: the whip and the hot coals (just kidding). The options are 1) making their heads spin with the notion of the wealth they can create if they act now while time is on their side, and 2) instilling in them an understanding of what things cost in the real world. In order to gain an understanding of what wealth means, teens need to know the worth of a dollar.
As we've tried to emphasize over the past weeks, each person is different, and it's difficult indeed to force a generalization onto any population, whether it be tenth-graders, cyber-spelunkers, or people whose last name ends with the letter "e." However, a comedian friend of mine used to say, "If you're like most people -- and who isn't?" In other words, generalities do, in general, apply. So...
What Do Teens Know?
What do teens know? We spoke to current and former teenagers (all highly qualified) in order to find out.
Not surprisingly, some of teenagers' ignorance about investing is actually quite similar to that of their parents. If a teenager does own a stock, such as Converse or Nike, their degree of involvement in it is often limited to, "Yippee! It's going up!" Further, they're often seduced by the idea of penny stocks, since the logic of "if it only costs fifty cents, it only has to gain fifty cents in order to double" is alluring. The fact that penny stocks are most often a prescription for disaster is more difficult to communicate.
We also spoke to one teenager who possesses a vast and unusual degree of investment savvy. We asked him what it is that attracts him to investing. He said, with refreshing candor, "Greed."
His amplification, though, was more illuminating. As early as the fifth grade he began to dream of having the nice things that money can buy, and he decided to ditch the baseball cards that seemed to mesmerize his friends. His initial interest was in companies like Pepsi and Coke and GE, "All companies I knew with products that I could see and touch." He began reading the business pages of the New York Times, and then moved on to Business Week and Fortune magazine. He became enthralled with Asian and Latin American markets, seeing that their growth was much greater than that of the U.S. He began to invest, but three months later, those markets crashed, and "I lost almost 40% of my life savings." He then began to study what went wrong, and read Peter Lynch and read up on Warren Buffett, and came upon The Motley Fool.
Following on the previous weeks' notions of making the abstract concrete and of engaging a young person in an activity that isn't abstract and boring, here are five things that a teenager ought to be doing:
1) Get interested in stocks of youth-friendly companies
It isn't enough to be a cheerleader when Coke or Converse stocks go up, but it's a start. Where there is interest, there can be learning.
2) Have a bank account
If you read last week's column, you'll know that children can actually open savings accounts as early as the second grade. By the time your child is a teenager, he should definitely have a bank account and should be adding to it regularly. He may also have a custodial account with a discount broker.
3) Set up a budget (with your help)
Since your teenager is no doubt buying his own tapes or CDs and telling you which clothes he wants, he's capable of making consumer decisions. He should, then, begin to realize the value of what he's buying -- what it costs and what it takes to raise that money. If he has an allowance, how much does that contribute to his overall income over the course of a year? Does he have a part-time job outside the house? Is he paid for doing certain kinds of work around the house, and if so, how much? Again, this should be tied as much as possible to the things that he wants. Want to go to Europe? All right then -- how much does it cost, what will his contribution be, and when does he have to start saving?
4) Learn what things cost
CDs, clothes, food, cars, movies, books, trips to Saskatchewan, ski trips, camping trips, rents, and even houses. For some of these things, of course, they know the costs, since they are motivated to buy the music they love to hear. The long-term benefits of investing are best understood if they are concrete.
5) Understand compound interest
In particular, understand the idea that if something is increasing at the rate of a set percentage each year, then the more of it you have and the greater the increase in value. If you're earning 20% and you have $100, then at the end of the first year you'll have $120. But if you have $1,000,000 earning 20%, you'll have an extra $200,000 by the end of that first year. The reason this is important is that if you invest steadily, over time, you will indeed end up with that $1,000,000 and more. Time is your friend. Your view of immortality, if it results in your not taking action in investing, will turn time into your enemy.
We've been looking at what your child might be ready to learn, and when. That's a separate issue, though, from what you might be doing for your child in order to secure her financial future. Next week, we'll take a look at some of the pros and cons of various investment vehicles.
[See what Foolish parents are saying, and post your own thoughts, on the Family Fool message board.]
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