One of the subjects people often struggle with, including myself, is exactly how you should be teaching your kids about money. Well today I’m going to go beyond simple savings and talk to you about how I use a single stock to teach my kids investing basics, just like I promised on Monday.
Money is one of the few things that kids won’t usually learn about in school. Instead it’s expected that we as parents teach them. That’s a shame, honestly, given that there are so many parents out there that don’t understand the concepts of investing themselves. If they don’t understand, how can they be expected to teach their kids?
Fortunately, investing is something that I’m familiar with (probably too familiar!) and it’s something I want to teach my kids. But how? I do it with a single stock. I bought one share of Nintendo for my oldest son when he was nine, and one share of Disney for my middle son when he was six.
Before I tell you how I do this, let me tell you about my usual investing philosophy-and why for this situation I do something different for my kids.
My Stock Investing Philosophy
I was a Boglehead before they existed. Literally.
Back in the year 2000 or so, after I had read The Wealthy Barber as a teenager, I was an avid reader of all things personal finance and investing. The internet was relatively well established then, although it was no where near as sophisticated as it is now. The main source of my information was books, although online was a close second.
In reading about investing, I kept coming across a concept called “index funds” that made total sense to me. I could see clearly from everything I was learning that it was near-impossible to beat the market. If you can’t beat the market, why not be the market? I read Bogle’s books John Bogle On Mutual Funds and/or Common Sense On Mutual Funds (can’t say for sure which one, although it might have been both). Eventually I found a website called Morningstar which had a forum dedicated to the Bogle philosophy, called the Die Hards. I would hang out there, and later the Bogleheads forum after it was created, for years but never post. I suppose I was the ultimate lurker, but I always felt both shy and like I didn’t really know enough to join in the conversation-particularly in my 20’s.
My first account at Vanguard was opened in the early 2000’s. I can still remember how excited I was when I finally scraped together enough money to meet their minimum investing requirement of $3k. I dreamed of one day, far in the future, becoming a Voyager or Flagship client. I felt so successful and proud when I got that very first statement in the mail. Side note – I was also sad when they dropped the minimum to become a Voyager client. I’d been working hard at that goal! I felt cheated.
So I’m an index fund investor, through and through. Over the years I’ve changed the mix of specific funds and simplified my strategy, but it’s been basically unchanged for almost twenty years now. Why? Because it’s the simpelest, set it and forget it strategy for investing. I don’t have to think about what I’m going to do, or obsess about tweaking my strategy around the edges, or even really pay much attention to it at all. I just leave it there to grow – or crash in 2008 – and leave it alone.
Then Why Individual Stocks For The Kids?
So if I’m such a die-hard index fund fan, why did I pick individual stocks as the tool to help teach my kids about investing?
As much as I love index funds, they are a much more abstract concept than understanding how an individual stock works. It’s easier for younger kids to understand what a stock is, what a dividend is, why the price goes up and down, etc. in the context of a single company that they know of. If it’s a company where they can easily comprehend the business model (as in, the company sells things they know and understand), you can use it as a great example to explain how the stock market works.
You see, an index fund is just made out of a bunch of individual stocks. Yes, they’re weighted according to their presence inside whichever index it is that you’re in-exactly how they’re weighted varies. But once you understand how an individual stock works-what it represents, why it changes, why it does what it does – then you understand the index. The index is really just a bunch of companies all undergoing the same processes. It’s only their business model that varies-the financial fundamentals are the same.
So what companies do I have my kids own a share in? Why, Nintendo and Disney, of course. Those are two companies that are part of their day-to-day lives. My kids are huge Nintendo fans and have been for years. We have a Wii, a Wii U, and they each have a 3DS. They’ve gotten Amibos for Christmas and birthday gifts (quite a stack of them actually) and are fans of Mario, Zelda, and the whole gang. In fact my middle son used his amiibos to make an awesome board game. He’s so creative.
For Disney, again, that’s a company where they can easily understand the business model. They see Disney movies, the Disney store, and they’ve been to Disney World a few times. We have close relatives in Florida we visit every few years, and we always make a stop at Disney when we’re there. Over the years since we’ve bought that share, Disney has expanded their empire by purchasing Lucasfilms and Marvel. They also know that Disney owns Pixar, the company that makes so many movies they love.
Years ago, I bought each son one share of each company. You can see the current value below.
Why do they actually own slightly over one share each? Dividends, of course. I have both accounts set up to automatically re-invest dividends, so over the years they’ve accumulated slightly over a share of each company. Having the share be in a company that pays dividends, even if it’s a small amount, helps you be able to explain dividends and retained earnings in a simple way they can understand.
If you have more than one child, I like getting them each a share in a different company. Why? Because then you can use the different business models, different earnings, and different stock market up/down periods to compare and contrast different companies.
Talking To Your Kids About Stocks Without Boring Them To Tears
I’ve talked about this before, but three things I do when teaching my kids about money are:
- Use everyday events like going to hot air balloon festivals, school book fairs, or their desire for wizard chess to teach them the money basics. Saving, delayed gratification, wise choices, and looking for bargains are the name of that game.
- For more sophisticated and detailed (and, lets face it, possibly boring) subjects like compound interest, college and investing, I use a different strategy. I look for openings to connect these subjects to something going on in our real lives, and briefly discuss them while I have my kids interest. If I see them starting to look bored or not pay attention, I give it a rest
- I make sure to tailor the conversation to their age and maturity level. My 14 year old is able to understand much more sophisticated concepts now than when he was nine. So our conversations about his stock (and college) are different. My ten year old is VERY interested in money but a bit bored about the mechanics. So we keep our conversations short.
What You Can Talk About
Are you drawing a blank as to what to actually talk with your kids about to help them learn about stocks?
Take a look at these two charts – the all-time performance of my kids shares. After you’ve looked at them, I’ll tell you what I would talk with them about. The “all time” performance is roughly four years, because I bought them four years ago.
Here are some of the things we talk about. Note that we don’t talk about these all at once in one big lecture session, but we’ve touched on all these subjects over the past four plus years.
- Why one share of Disney costs so much more than Nintendo
- What it means to own a stock (that you’re an owner in the company), and how that’s different than a bond (where you’re lending money to the company)
- Why Nintendo has averaged an annual return of 50% over the past four years, but Disney only 10%
- Why Nintendo went up, and up, and up, while Disney went up slightly and then down over the same time
- How Disney and Nintendo make money, and how their businesses work “behind the scenes”. This is especially interesting to talk about when the kids see the companies doing something successful in the market, but the stock goes down.
- What retained earnings and dividends are, and how companies decide which one to do
As they get even older, our discussions will get more detailed and technical. I plan to print off a copy of their annual reports and go through it with my boys, showing them how an income statement, statement of cash flows, and balance sheet work (aka net worth). Interestingly, those same three corporate financial statements can be useful to you when reporting out to your family executive office on the overall family financial situation. If you’ve already taught your kids about budgeting and net worth calculation, then explaining the basics of the corporate version should be a snap.
Why Do I Do This?
I’m a busy mom – I have three boys, work more than full time in a corporate job, and run this site mornings/nights and weekends. So why is teaching my kids about stocks on my list of “to dos”?
The answer is simple. If I don’t teach them, no one will. Sure, if the decide to go into a career in business or finance, they’ll learn the concepts at that time. And if they’re like me and make personal finance and investing a hobby, then they’ll dive deep into the details. But this isn’t a subject they cover in schools, and because of that, I need to make sure my kids have knowledge of the basics of Saving and Investing 101. Armed with that knowledge they’ll be able to build themselves a successful financial future-no matter what career they go into.
How do you teach your kids about stock investing-or have you not done this, but you’re going to start now with this idea!? What suggestions would you add? Let me know in the comments!
Want to learn more about teaching kids about money? Check out this great page with my top articles and resources I’ve found from around the web.
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