I Taught My Son About Investing With This 1 Easy Trick
Since my boys were small, I've answered their questions in simple, yet clear terms -- even the tough ones. And I don't answer more than they ask. That's a sure-fire way to confuse a kid.
When he was 4, my now-13-year-old decided he had to know where babies came from. That's a tricky topic under any circumstances, but oh, the questions he asked. "The baby grows in Mommy's tummy" just didn't cut it. So driving home from the children's museum, I answered his rather detailed questions in as simple terms as my mommy brain could handle.
My philosophy about answering only the questions they ask has carried over into finances. When my sons were little, they were fascinated with the idea of owning part of a company through stocks. Their interest pretty much ended there, however.
I left the door open for them to invest in a company they believed in, but they didn't take the , preferring instead to watch their money grow in savings accounts. I guess it was more tangible for them to see their money divided up each week between spending money, charity and savings.
That changed recently.
My 13-year-old, Hamada, overheard my husband and me talking about stock purchase and dividend reinvestment plans (DRIPs) that we wanted to pursue. (These plans allow you to purchase stocks and reinvest your dividends directly through the company.) His ears perked up when we mentioned Coca-Cola, and the questions ensued.
He wanted to know everything -- how you buy them, how you choose a company, who you buy from, where the money goes, when you get your money, what dividends are, what the stockis. We talked for about 90 minutes. That's amazing for any conversation between a teenager and his parents, much less a talk about something as complicated as stocks.
I explained to him what DRIPs were, how they bypass the broker and why that meant their fees can be cheaper than those of other stock purchases. We talked about the importance of "buying and forgetting" rather than trying to "time the market," how it's important not to sell when the market is down and how dividend reinvestment builds your wealth in a very easy way.
In the end, I asked him if he was interested in investing. Remarkably, he said yes.
We began to research companies, sitting side-by-side on the couch, with my laptop on my lap.
First off, I wanted to know what interested him. I explained to him that larger, more established companies would have dividends, something that had caught his fancy. Not surprisingly, his interests steered toward computer-related companies: Google, Apple, Microsoft, Facebook. He was interested in Angry Birds maker Rovio Entertainment, and that gave me the opportunity to explain how initial public offerings work because Rovio isn't public yet. (Those of us who are avidly watching them hope that change sometime in 2013, however.)
We looked at stock price history, cash assets, whether companies had dividends and DRIPs and we decided on Microsoft. It has a reinvestment plan, its dividend history is respectable, and it is rich in assets.
Luckily, you can sign up for Microsoft's DRIP online, which allowed Hamada to watch me fill out the paperwork and ask questions as we went. He took great satisfaction in seeing at the top of the files his name as the investor, even though I would manage the account. We put in the minimum $250 with a monthly automatic debit of $25. My husband and I committed that we would pay half of the $250 and $10 plus the fees for the auto debit.
The next day, Hamada was in a minor panic about the purchase. He had regrets about being forced to reinvest rather than receiving dividends. (Microsoft's DRIP manager requires reinvesting if you have fewer than 100.) I talked him down by reminding him that this is a 10- to 20-year commitment, not something that he benefit from today.
[InvestingAnswers Feature: How to Talk to Your Kids About the Financial Facts of Life]
I gave him a chance to think about it, and he came back to me later in the day and asked me what he should do. We talked about how much money it could be worth in 20 years ($11,000 at a 5% rate of return), and he liked that idea. In the end, he stuck with the original plan.
If I hadn't answered his early questions about stocks (and babies), he probably wouldn't have shown interest when he was old enough to comprehend the complexities of the market. By not boring him with the intricacies of equities early on, I laid the groundwork to ensure that he was more open to the concepts of stock ownership.
It's exciting to see your child comprehend a new concept. Like the first time they tie their shoes or you let go of the back of their bike, watching a child buy his own stock while armed with the facts is a deeply satisfying experience for a parent.
The Investing Answer: Only answer the question your child asks. Don't go into detail unless he expresses interest. That way you can ensure that he learn when he is ready.