If you want to turn fairly small amounts of money into a lot more, one of the best methods available is to invest in the stocks of strong companies. But to really make that recipe pay off, you need to add another ingredient: time -- preferably lots of time -- to let the power of compound growth do its work. That reason alone should be a good enough one to encourage parents to start teaching their children about investing early, and one couple who wrote to the Motley Fool Answers team intends to do just that -- only they aren't quite sure how they want to go about it.
In this segment of the Motley Fool Answers mailbag episode, hosts Alison Southwick and Robert Brokamp -- and their guest, Buck Hartzell, the company's director of Investor Learning and Operations -- offer their best advice to these forward-thinking parents.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on April 30, 2019.
Alison Southwick: And our last question comes from Janet. "My husband and I both came late to investing in our late thirties." I would argue that's not too late.
Robert Brokamp: No.
Buck Hartzell: Not as late as some.
Southwick: "We'd like to give our kids, ages 12, eight, and five, a better start. We've already taught them about savings and they each have a small savings account. Now our kids are asking us questions about investing as they overhear us talking about our stocks and brokerage accounts. It seems like a good time to formally introduce them to investing.
"Our questions are what is the best way to set up a brokerage account for them? Should we put their respective names as a joint owner? We don't want them to have control over transactions, yet. Should we simply make our own sub accounts with the understanding that X,Y, and Z accounts are meant for each child?
"Do you recommend any fantasy investing account where they can buy and sell for 10 shares without playing with real money? Are there any safe games apps that teach kids about investing in a fun way?"
Hartzell: First of all, congratulations! I know that your children will thank you later on in life for getting them started, because as we know with investing, this compounded interest is a great thing and it's really when you start -- not even how much you save -- and getting a start at 12 and eight, they're going to have such a head start in life. So congratulations on that!
What should you do? I think you should consider setting up a custodial account. I would set it up in their names. You're going to have to oversee that until they're 18 years old. We did that for each of our kids. But you can go in there and they can watch you make the trade and do all that kind of stuff. They can see what they own. That's a great way for them to get started, so I think a custodial account is probably the way to go.
Southwick: And then when they turn 18, does the money automatically go to them and it's out of your hands?
Hartzell: They take it over. Yes, it's all theirs when they're 18.
Southwick: And there's nothing you can do if your kid ends up kind of a clunker?
Brokamp: A clunker! [Laughs]
Southwick: Is that something you would call a kid?
Hartzell: Well, there's a couple of ways to think about that. I would say that this is probably not going to be all your assets, so if the kid is a clunker, and they're going to make some mistakes, you'd probably want to have them make those mistakes with that account before they inherit what you've saved, because I imagine if you're starting with your kids, you're going to have a decent amount of savings.
They've got to learn at some point in time, and so learning with a little bit less is probably better than when they inherit it all and go, "I've never done this before." I would suggest a custodial account.
And then for fantasy, I would say Caps.Fool.com is a good place for people to go here. It's free. They can enter whether they think that stock will beat the market or not. Once they get seven stocks, they'll have a rating. That's a good way to learn what other people like and just get them interested in stocks.
A couple of other things that my kids enjoyed when they were younger. One is we played The Market Cap Game. That is you can take 20 different companies, put two rows of stocks there, and we used to give out $1 for every right answer. They would just say which company is bigger by market cap. You could have General Motors and Microsoft and go down the list.
The great thing about it is it fosters discussions about these different companies. Also, they could have hints. They were free. They were always truthful, but sometimes misleading. They could ask, "Who has more sales in those companies?" You'd tell them General Motors has many more sales than Microsoft. They would say, "OK, that's the bigger one." Wrong. We have a discussion about how profitable Microsoft is versus General Motors, and it leads to good discussions about that.
And the last thing I'll suggest, and I think this is great to get somebody interested in investing, is encourage your children to start their own business. That may sound funny because they're 12 and eight, but they can. You'd be surprised how entrepreneurial kids are. Give them a little bit of seed money -- $100 or $200 -- and let them figure out a business for themselves. They'll learn about shoebox accounting. What are my expenses? What are my revenues and what are my profits? There's all kinds of great lessons that come out. It doesn't have to be a big business. It could be babysitting, dog walking, making lemonade, shoveling snow. It's a great way to learn about investing and kindle that fire.
Southwick: The Motley Fool also has a mobile game coming out in the next few months, so keep an eye out for that, Janet! I haven't played it. You look like you don't believe me.
Hartzell: No, I believe you! We've got people slaving away on that game.
Southwick: It should be out in the next few months.
Hartzell: I'm sure it's going to be awesome! Do kids like mobile games? Do they play them these days?
Southwick: They're probably on to something else. Something we don't even understand.
Brokamp: One thing I'll say about custodial accounts is it is an asset owned by the kid. We talked about how they get possession of it at the age of majority. Also, when you apply for financial aid for college, assets owned by the kid will reduce your aid more than if it's an asset owned by the parent. For a lot of people it doesn't matter because they're not going to get financial aid anyhow, but if you think that is in your future, you might consider having the account yourself and you're just going to hand it over at the right time.
Rick Engdahl: Can I add something really quick?
Engdahl: This works for my kids, anyway. We use Stockpile as our brokerage. It allows the kids to have a window into their own account. They can actually make a trade and it comes to me as the guardian of the account to approve their trade. That way they can have a little more hands-on and still it's in your control to make the trades that they do. And they also do fractional shares, which is important for a small balance. It lets them buy companies like Berkshire, or whatever, that are high-dollar stock price but still good companies.
Hartzell: That's great!
Southwick: Can't you easily gift stocks through Stockpile as well?
Engdahl: Yes, that was their shtick at the beginning, is you could buy gift cards in the grocery store and hand them to them. "Here's shares of Microsoft." That's kind of a neat little gimmick, but I think that there's other aspects of that particular brokerage that are even more conducive to investing for kids. There may well be other brokerages out there that are equally good for different reasons, but that's one that I like. They don't do much. My kids are a little young, but I like the idea that they can make the trade and it comes to me for approval. That's cool!
Hartzell: That's cool. And FolioFN has the ability to, in one trade, buy portions of a whole portfolio of stocks. So you could put in $10 or $15 and in one trade they get a spread across that, which is really nice if you have a small amount of money and you want to spread it and get some diversification across a basket of companies. That's another option for folks.