Teaching children about investing can be accomplished using Drips. But what companies should they buy and what is the purpose? George Smyth says to let them invest in whatever interests them. At this stage, the purpose is to learn, more than it is to make money. Drips make the learning affordable, and the knowledge gained should eventually more than pay for itself.
Years ago, my purpose was the latter. When I started investing, my purchases were outright, not Drips. My intention was to give my children a choice in the companies that would benefit them in the future, hopefully encouraging them to gain an interest in investing.
My initial conversation with Jimmy, my son of 13 at the time, went something like this:
Dad: "I'm going to buy some stock for you to use for college. What company would you like me to purchase?"
Dad: "Gee, I don't know if they're traded in New York. Let's try another one."
Jimmy: "How about Playboy (NYSE: PLA)?"
Dad: "Well, that would be OK, but I don't know if your mother would let you read the annual report. Any other ideas?"
Jimmy (looking at my printer): "How about Hewlett-Packard (NYSE: HWP)?"
The company has seen annualized returns of more than 25% since the purchase, so his selection was fortunate. That's how we got started. His later picks were Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), and Dell Computer (Nasdaq: DELL) -- also not bad.
We made no consideration for fundamentals. If my intention had been to find a company that I thought would provide the greatest returns over the time frame under consideration, the thought process would have been completely different.
I imagine that many other fathers think it would have been a better idea to either select Disney (NYSE: DIS) or some other company in which we normally consider kids to have an interest. That didn't make much sense to me, however. I wanted my son to own companies that he would follow and appreciate. Follow them he did, as he compared his selections to his sister's initial selection, PepsiCo (NYSE: PEP).
Allowing children to select their own companies not only empowers them, but also gives them the chance to have a stake in the results. Are the results important? In my case, not really. The lesson was most important.
Just as you would not base your entire retirement possibilities on a single stock, neither would you allow your child's selection to encompass their complete college portfolio. If their selection does not pan out as expected, you will be making up for this in other investment arenas that you choose yourself.
Additionally, empowering the child offers her a greater chance to learn. Katie, my daughter, selected Claire's Stores (NYSE: CLE) as one of her stocks. The stock pretty much did nothing, but she would visit the store at the mall with the understanding that she was a part owner of the company. If this results in a lifetime of appreciation for investing properly, then it will have been worth the thousands of dollars that could have been gained with a better selection. This is what I refer to as long-term thinking.
Next week I will offer the results of the responses offered by many Fools (perhaps including you) concerning the companies they hold in their Drip portfolios. Although tallying the results has been very time-consuming, it has been a lot of fun and a real eye-opener. Anyone who has not followed the thread on the discussion board (where Fools shared what they owned) will be surprised by the results.
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