When's the last time you and your kids had a rousing family discussion about investing? For many parents, the answer may be never. And that's too bad, because if we don't teach our kids how and why to invest, we're essentially training them to fail at building a nest egg for emergencies and retirement.
That sounds harsh, I know. We parents have enough to do already. But starting our kids young means they'll be on investing autopilot by the time they have their first real job -- and they'll be less likely to take the typical twenty-something approach of putting off investing for "later" because they think they have all the time in the world and believe the market is too risky.
The problem for most parents is that we either feel unqualified to teach our kids about investing, or we know enough to make it boring. Telling kids about P/E ratios when they're more worried about their kickball team in P.E. is a waste of everyone's time. Keep it simple, make it hands-on, and remember that the goal is to develop an investing habit. Detailed understanding can develop later.
1. Introduce the idea of stocks
The simplest way to help kids grasp the notion of stocks is to make it personal. If you invest in stores, toy makers, or restaurants your kids like, point out that you own a small part of those companies and explain that your kids can (with your help) own a little bit of companies they like, too. Fool analyst Jason Moser took this approach to kick-start his kids' interest in investing. He told The Wall Street Journal that his daughters choose a different stock every quarter to invest in. Earlier this year Jason penned an article for Fool.com titled "10 Reasons to Teach Your Kids to Invest" starting with quality time and ending with fun.
Disney is a popular recommendation for kids' first stocks, but My Little Pony and Transformers fans might go for Hasbro, and older kids might prefer Twitter or a game company like Activision Blizzard. While kids won't understand the financial details of these companies' business, they do understand their toys, games, and social media. (Looking for more stock ideas? Longtime Fool Selena Maranjian provides a longer list of stocks with kid appeal here.)
2. Explain why stocks are useful
Of course, your kids need to know that stock ownership is worth more than Optimus Prime bragging rights. Spend some time looking at stock charts together to see how value can grow or decline over time. For example, charting Hasbro can show your kids that the company's stock price changes over the course of a day, a quarter, or 10 years. Comparing these time periods is a concrete, visual way to show that while a well-chosen stock's price may fluctuate in the short term, it gains value over the long run.
Middle-schoolers and teens can examine stock market performance in more detail than younger kids. Allowance Manager founder and CEO Dan Meader recommends checking out the NASDAQ composite index for short- and long-term results. "Show the kids the following chart and discuss what happened at each point... Also compare entry and exit points over time to understand the effect of market fluctuations on portfolio value and the principle of dollar-cost averaging."
Long-term gains take a really long time to a child, of course. Make the value of investing more real to your kids by pointing out how old they'll be in, say, 10 years, and what they could do with more money then: buy a car, make a down payment on a house, start a business, or help pay for college.
3. Put some money in the market
Once your kids get the basic what and why of stocks, it's time to get into the market. There are a couple of ways to proceed. One is to create your own mini market, as The First National Bank of Dad author David Owen did. He let his kids pick stocks and trade them on his homemade exchange at a penny on the dollar. "While a single share of IBM on the NYSE traded for $95... a single share of IBM on the Dad Stock Exchange traded for 95 cents." For parents with the time to play market-maker, this is a fun, hands-on strategy that allows even kids with tiny allowances to pick stocks and see real-world results.
If you don't have time, or if your kids are OK with market risks, it's time to get in for real. You can open custodial accounts for your children through discount trading services like E*Trade and Sharebuilder. Because these services don't require an initial minimum investment, it's easy for kids to use their allowance money or chore earnings to invest in companies they like and expect to do well. (Before you put a lot of money into a custodial account, though, know when your child can legally take control of it and decide how much financial freedom you'd like them to have at, say, age 18.)
4. Put it on autopilot
When your kids decide to get into the market, have them mark a portion of their allowance or job income to invest each month. This routine investing is the ultimate goal. If your kids have years of habit behind them by the time they get their first real paycheck, they'll be more likely to automatically invest some of that money instead of putting it off for later.
If your kids just aren't into picking individual stocks, you can still help them invest in mutual funds or a 529 college savings account. The point is to make investing a lifelong habit. Parents who invest in the effort now are more likely to have financially stable adult children later.