Teaching children the basics of investing is an important yet complex task – but it can seem less compelling than the latest Instagram update or Snapchat filter.
So then, how can parents, or even grandparents, teach children in a fun, engaging – and possibly rewarding – way? Try building a small stock portfolio together to make the lessons more real.
Topics can range from the benefits of compound interest and dollar-cost averaging to the downsides of instant gratification. The goal is to impart principles that can help them to become financially responsible adults.
"As parents and grandparents, we can teach children the ABCs of investing, especially if we start when they're young," says Adrian Mastracci, senior portfolio manager and financial advisor at Lycos Asset Management in Vancouver.
"Using stocks to show kids the art and science of investing prepares them for their future. It also takes away the mysteries associated with the markets."
Talk about the roles of banks and investment professionals, interest rates and company fortunes "so that the children appreciate and understand how they fit into the investment puzzle," he says.
Steve Shepherd, vice-president and portfolio manager at BMO Global Asset Management, says it's important for the lessons to be "relatable," depending on the age of the child.
"Teaching them investing from a textbook probably isn't going to work." Instead, stocks offer something that children can "wrap their hands around that is tangible, that they hear about on a daily basis," he says. "This is something a child can put Grandma's birthday money into and track."
Included in this teachable moment is deciding what to invest in and why. "You're looking for name brands that are going to be around for decades, not the latest stock market trend," cautions Mr. Shepherd. "You're not looking to make as much money as possible. This is investing 101; you want to learn the basics of the market."
It's critical to get children curious about each company, drawing the connection between what it produces, the impact it has and its overall business model, says Kara Lilly, an investment strategist at Mawer Investment Management in Calgary.
"A lot of this is just getting comfortable with the idea and the knowledge behind the investment. The earlier you start, the better that process is," she says.
Looking at what makes a good company and linking that to the market is best done by children investing in individual stocks, Ms. Lilly says, although exchange-traded funds offer "interesting things to learn as well," such how markets and portfolios perform over time.
"You can take either approach, but you're missing a little bit of a learning opportunity if you don't let kids look at individual companies, because they do matter."
Mr. Mastracci says that "as the children mature, you can introduce mutual funds, bonds, market indices and the like … Those are topics for five or 10 years from now."
The experts suggest the following stocks could make good life lessons for young investors:
Apple is a good place to start because it is a company that even the tiniest investor can appreciate, Mr. Mastracci says. "Everybody understands Apple or has heard of Apple or has a product from Apple," which is important when it comes to teaching children about a stock. "I think you need a name."
At a hefty price per share "you may not want to buy too many," he says, but "it's done well over the years and keeps getting to new highs." Apple stock also pays dividends, Mr. Mastracci notes. "It's nice for a child to get something back in his or her account. Kids love getting more."
He suggests that parents put aside thoughts of long-term asset allocation for the starter portfolio. "Concentrate on making it an experience that children can relate to in their everyday life. This is the more important lesson."
Walt Disney Co.
It's important for young investors to learn about diversification, and Disney personifies this principle, with holdings from sports giant ESPN to theme parks and a film empire, says Mr. Shepherd. "It's a huge company, it has well-diversified revenue streams and it's going to be there for the long run."
Mr. Shepherd, who owns Disney stock himself, says it makes sense for kids to pursue companies they're interested in such as Disney, Hasbro and Mattel, for example. He suggests that parents encourage children to follow current events and watch the impact on their stock, for example whether a global recession hits revenues at Disney theme parks.
Children can look at action figures that line the toy store aisles and say, "I own some of this company," Mr. Shepherd remarks. "That's what kids really need to key into."
With a dominant market position, a dynamic management team and a compelling personal connection for even the youngest users of the Internet, Google fits well into a child's portfolio, says Ms. Lilly.
"Google can be thought of as a media company and a marketing services company. It has a strong competitive moat and profitable business model, which makes it a wealth-creating business and a compelling potential investment," she says. The company's global search market share is approximately 70 per cent, and it has a strong position within the mobile search market through its Android operating system.
The company's founders have created a culture of innovation, it promotes the development of game-changing technologies and it is not reliant on a product that could have a limited shelf life, Ms. Lilly adds. "It is the go-to. It's hard to see how it gets dislodged over time."
ABCs of investing for children
Here are some tips from Mr. Mastracci at Lycos Asset Management in Vancouver:
- Begin a simple portfolio with three or more stocks that children can relate to – a social media, music or soft-drink company, computer firm or famous restaurant.
- Ask for children’s input in the stock selection process and engage them in discussions of how these companies affect their lives.
- Allow children to do as much of the maintenance as possible, such as looking up stock prices and updating the portfolio.
- Make sure that at least one of the chosen companies sends a regular dividend, no matter how small.
- If possible, select a local company for the portfolio where children can attend the annual general meeting of shareholders, even briefly.
- Direct a small percentage of children’s monetary gifts and allowances to purchase stocks, building a disciplined, committed approach to investing.
- Make sure children receive and review with you all shareholder communication, such as quarterly and annual reports, from each company selected.
- Don’t worry if kids make some investment mistakes. They’ll learn valuable lessons that after all aren’t too costly.