By Max Osbon
It’s never too early to start educating your children on investing. From their younger vantage point, kids have their own set of investment advantages. Take the following steps for an easy hands-on process to get kids thinking about investing and help them prepare for the day when they manage their own finances.
Choose Investments That Interest Them
One of the most effective ways to introduce and hone best investment practices with your children is to orient the subject matter towards what interests them. Make it relevant to their worlds.
Your kids have far more exposure to emerging products and trends than you do. They are the target audience for billions of dollars of marketing budgets, from apps to apparel. The cultural references that grab their attention are often the beginnings of real business success stories. Today’s video games, YouTube stars, Instagrammers, athletes, movies and clothing are all integrated into a complex web of marketing tactics. If your kids develop a particular interest in Apple products, Nike sneakers, Snapchat, or cryptocurrencies, take notice as it could be the first sign of an investment opportunity. (For related reading, see: Teaching Financial Literacy to Tweens: Income and Expenses.)
Ask your kids what brands they think are going to do well and which ones are falling out of favor. Help them figure out if those brands are something you can invest in. It’s tough to invest directly in Fortnite, for example. They may not always pick winners, but there are valuable lessons to be learned when stocks decline, too.
Your kids don’t have the experience to know how to size an investment, how to be patient through the ups and downs of the market or how to evaluate a business model or capital structure. This is where you can add a professional layer to the process.
Set Up An Investing Account
I prefer using a traditional brokerage like Fidelity Invesments or Charles Schwab Corp. because they have market and limit orders and a more professional interface. Robinhood via its mobile app works, too.
Invest $1,000 Per Idea
A thousand dollars is a lot of money for a young person. It’s large enough where the long-term gains are meaningful but also small enough where the daily swings in dollar value are comparable to the prices of things they tend to spend money on.
Set a Timeline
Investing for the long term is an ideal habit to practice and preach. Set a minimum amount of time to hold the investments. Hold long enough to ride out short-term market swings and let the investment realize its potential. Thirty days minimum and up to three years is reasonable. Three years is a good way to demonstrate how investing can be boring, too.
Start With Stocks
Invest in single stocks first and eventually transfer gains to diversified ETFs. Learning to diversify is a key element of this process. As the maxim goes: “You get rich through concentration and stay rich through diversification.”
Discuss When to Sell
Do you decide to sell the whole thing, 50%, only the profits or the value of the original investment (cost basis)? Decide together which portion you will sell when you to take profits off the table.
Track Your Progress
It’s easy to track the performance of a single investment in a single stock by watching the price go up and down via Google. Tracking performance through contributions, withdrawals, buys, sells, dividends and interest payments is more complex.
I would suggest keeping a written log of your decisions so you don’t forget what was said and why. Investing with your children will allow you an opportunity to show them directly how the process works while giving them experience with managing money and investments. (For more from this author, see: 5 Financial Lessons for Your Kids This Summer.)
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This article was originally published on Investopedia