You may not even realise it, but you’re teaching your children financial lessons all the time. Your attitude to money and the way you handle it in your day-to-day life are more closely monitored by your children than you might think. And these behaviours will impact their future relationship with money. Investing, however, is one of the topics that is hardly mentioned at home, let alone taught in schools. And given how accessible it has become for the DIY investor, it could be wise to teach your kids some strong fundamentals.
Here, I take a look at five key investing basics that you should teach your teens before they leave home.
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1. Start with the basics
Investing can feel extremely complicated in the beginning. The lingo alone might make youngsters question their decision to learn about investing and finance. So aim to help them understand investing terminology by starting with easier concepts and progressing to more challenging ones. Aim to break down complicated words and topics and provide illustrative examples.
You could use a game-like format where you ask them questions and they win rewards for every right answer. This will solidify their conceptual knowledge about the investing basics early on and will set a great foundation that they could build upon.
2. Use the brands your teens are familiar with
If you want to teach your children key investing basics, challenge them to build a portfolio of companies they are familiar with. Then ask them questions about certain consumer behaviours that have influenced their choices. They can initially start with their own preferences for clothing brands, tech companies and streaming providers.
In this way, you will stimulate them to look out for trends that create demand for new products like ‘green’ tech, healthy eating and much more. Again, make them think about how these consumer needs could affect their investments now and in the future. In this way, they will get used to looking out for signs that could guide them to the next big thing.
3. Diversification is key
Make sure you discuss the old expression about not putting all your eggs in one basket. You want to instil in them that portfolio diversification could protect their investments by placing their eggs in several different baskets. Once they grasp the basics, you can move on to spreading capital between different businesses, industries and geographies.
And while diversification could help to reduce the risk, make sure they also acknowledge that it will not automatically protect them from loss or ensure them a profit.
4. Buy and hold
Teens might think of investing as a game where they could turn a profit with a click of a button. It is your responsibility to teach your child that this is not a game and it involves real risks.
In the short term, markets could go up and down in a quite unpredictable manner. However, in the long term, markets have historically moved upward. So. investing regularly in quality businesses and holding them for years, has proven to be a successful strategy for investors like Warren Buffett. It is important to be transparent with your kids. Teens need to know that success is not guaranteed.
5. How compounding works
It’s important to teach your kids how compounding works. This is because they have the gift of time, meaning they can invest over many years. In this way, they can smooth out any market volatility and give themselves the chance to bag a profit.
Encourage them to find a compound interest calculator online and play around with it. Also aim to introduce them to practical tricks like the rule of 72 – a simple formula that could help them figure out how long it will take them to double their investment (72 ÷ interest rate = years). For example, let’s assume that they will make a 7% annual return on their investment. They can then take 72 and divide it by 7, which will show that their initial investment will double in approximately 10.28 years.
We’ve got tons of helpful resources, including our investing basics guide which is an excellent place to start.