Three Ways To Teach Your Kids To Invest Smart

You can’t expect kids to undertake investment homework as comprehensively as adults. And candidly, in a roaring bull market, luck and a tailwind can overwhelm the relevance of the exercise. However, as a forever-learning moment goes, it’s important to teach children basic due diligence. Today, with Eddie Haskells everywhere looking to cajole teens into taking their investing advice from Elon Musk tweets, it’s more important than ever that kids embrace homework. But where do you start?

Three basic concepts can go over well. First, gather a list of products the kids like.

Have a conversation about the products and services they enjoy. Which brands are important to them? Certainly, some companies may not trade on the stock exchange; others may not be worth the money. However, the conversation and documentation is an exercise in discovery and ultimately a start to homework.

Building passion around the investing process is important. Begin with a dialogue around brand loyalties (and start at an early age). When I was young, I drove my parents crazy: I always “needed” the latest Mattel’s Hot Wheels car or Hasbro’s G.I. Joe action figure. I would only eat Kellogg’s Frosted Flakes, not the store brand. I had to have the bacon with the Indian profile on the front (I can’t recall the brand).

Sidenote: I don’t suggest parents consider market index or exchange-traded funds. Frankly, kids learn nothing from indexing. The concept is too nebulous, too dispassionate. Teens can’t relate. The consideration of actual companies will enhance their attention. If they’re using the products or see you use them, there is ‘skin in the game’ to keep them engaged.

Second, start homework with the concept of sales.

I’ve found kids relate well to the concept. Whether you’re talking lemonade, girl-scout cookies, or school-related fund drives, children have an uncanny ability to understand that sales are positive and can lead to personal rewards. It’s the same for a business. Generally, the more goods or services sold, the more favorable it is to the stock price over time. It’s not difficult to find a company’s gross and net revenues and year-over-year changes (are they improving or decreasing?).

Third, watch your words!

l will never forget when my uncle, who was a specialist on the New York Stock Exchange floor, explained how I had the ability to own part of a large company. I was hooked. Wait: A poor kid from Brooklyn can own a piece of McDonald’s?

The language used around stock investing is important to help the kids gain a healthy perspective and a sense of pride in their selections and the investment experience overall. The phrase “buying a stock” is confusing compared to “ownership in a company,” which in essence is what you’re trying to help the children embrace.

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Disclosure: Real Investment Advice is powered by RIA Advisors, an investment advisory firm located in Houston, Texas with more than $800 million under management. As a team of certified and ...

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