Investing for kids can be fun and profitable. It can also be an important life lesson that will stay with them for the rest of their lives. After all, learning to invest is crucial to future financial independence.
Getting them interested in investing at an early age is important. If they see success investing at an early age via sound investing strategies, they are more likely to save money to invest as they go through life.
But the question is how to make investing for kids interesting such that they want to start. See below for our six-step guide to investing for kids.
Step One: Start Early
The best variable to generate strong, positive investment returns in the stock market is time. And as a result, the earlier in life you can get your kids to start investing, the better chance they will have to be successful because of their longer time in the market.
Albert Einstein long ago described compound interest as “the eighth wonder of the world”. The idea that if you stay invested in the stock market (or any investment) for long periods of time you can make profits on top of profits, which has a powerful multiplier effect for wealth creation.
There are always reasons to not invest, because life gets in the way and there are other more pressing short-term needs. And kids are no different, because often times the need for short term gratification outweighs the longer term needs when you are young.
Some parents will start the investing journey for their child by opening an account when they are born. Or other parents will help their kids start their investing journey later in life, on a significant birthday or event, like a graduation. All of these are good ideas. They reinforce the concept that the earlier you start investing as a kid, the better their chance of being successful in their investing journey.
See the next section as one example of how to motivate you kids to start investing early.
Step 2: Incentivize Your Kids to Invest
One way to incentivize kids at an early age is to match their savings up to a certain dollar about or percentage. This is equivalent to an employer match of a 401k plan that they will encounter later in life.
Your child will be more interested in putting half of the $100 they earned from babysitting into a saving investment account if their parents are going to match some of all the invested amount.
Step 3: Talk About Businesses Whose Products They Use Every Day
Relating investing to company’s whose products your kids use every day is likely one of the best ways to get them interested in the topic.
As they eat that burrito at Chipotle or drink that cup of coffee at Starbucks, you can start to talk about the fact that some companies are public and can be easily invested in and some companies are private and are likely not available to invest in.
Talking to kids about companies whose products they use every day will likely make them more interested in a business in general. Talking to them about how Amazon makes money when you have packages delivered to your front door every day will have more meaning then if you talk to them about a gold miner that is hard to relate to for most kids.
Step 4: Open A Brokerage Account
Opening a brokerage account so you can buy and sell stocks and bonds has never been easier. And in most cases you can open an account completely online via the company website or investing app.
There are many high-quality brokerage firms to choose from these days. Many investors that are older use some of the traditional brokerage firms like Charles Schwab or Merrill Edge. Younger investors seem to be drawn to newer brokerage firms like Robinhood or Acorns.
All of these products, and ones just like them, offer high quality research, free online trades and easy access to account information. Some, even allow you to open an account without requiring a minimum balance to start. This is very attractive, especially for a child’s account.
If you need assistance setting up the brokerage account, all these firms have good customer service teams that are very motivated to help get new clients set up.
Remember that unlike bank accounts, brokerage accounts are not FDIC insured, so you can lose some or all of your principle if the value of your investment declines over time. This should not dissuade you from opening a brokerage account. Instead, it is something simply to be aware of as you move forward.
The feature is called “Acorns Early” and allows you to invest $5 per day, week or month depending on your desired contributions.
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Step 5: Start Investing First in a High-Quality Mutual Fund
Investing for kids will be more fun if they see early success and truly understand what they are investing in.
The first couple thousands of dollars any child would want to invest should go into a high-quality mutual fund to give him or her instant diversification with their investment dollars.
A mutual fund is a professionally managed amount of money pooled by investors so that there are diversified holdings.
Different types of mutual funds invest in different things. Some invest in all stocks and some invest in all bonds. Some mutual funds invest in specialty items like foreign stocks or gold or bitcoin.
But there are two important things to understand about mutual funds:
For beginners we recommend a balanced mutual fund, which is one that invests in stocks and bonds so that you are fully diversified across asset types.
The balanced mutual fund we like the most continues to be Vanguard Wellington (ticker VWELX) – Talk about longevity, the Vanguard Wellington mutual fund goes all the way back to 1929, so it has seen some crazy economic cycles. And through it all, it has averaged an annual 9% return for its investors. Recent performance has been just as steady with its last five years performance averaging 11%.
Your kids will relate to Vanguard Wellington because:
Vanguard Wellington is a large fund with $112 billion in assets, and is 67% in stocks, 30% in bonds and 3% in cash. It pays a dividend of approximately 2% and its portfolio consists of some of the best growth stocks with iconic brands in the market today, such as Microsoft, Apple, Facebook, and McDonalds.
If we had one balanced mutual fund to recommend for the next five years, it would be Vanguard Wellington.
Step 6: Add Small Amounts of High Quality Stocks Once You Have Enough Invested in a Mutual Fund
Please, only high-quality stocks. Avoid all the advertisements of becoming a millionaire overnight by investing in options and penny stocks. Those kinds of investments are not for novice investors like kids. The way to build real wealth is to buy into high quality businesses and hold them for long periods of time.
And be sure to incorporate your child’s interests into the stocks you buy for their brokerage account.
If they love YouTube, make sure they know it is owned by Google/Alphabet and buy a fractional share.
If you set up their brokerage account with Merrill Edge, make sure they know if is owned by Bank of America and buy a share.
If they will not put their phone down long enough to talk to you, like most kids, maybe a share of Apple would make sense.
Getting your kids started early investing can be fun, profitable and educational for them.
And it will teach them valuable skills for later in life.
The key is to get them to start early. As parents, help them set up an account and get it initially funded. Then incent them in some way to add to the account from time to time.
The initial dollars in the brokerage should go towards a high-quality mutual fund like Vanguard Wellington that will give them immediate diversification.
After the initial investment in a mutual fund, be sure to incorporate high-quality stocks of businesses that your kids use everyday to make investing more interesting and relevant for them.