Two dads greeted each other in the center aisle of the department store and started talking. One dad had his son with him, maybe 9 or 10 years old, who, at this age, would likely be bored and restless in a matter of minutes. This time, however, he wasn’t. He was listening.
When the conversation shifted to investments, they commented on their 401(k) plans and, of course, the markets: “It’s not stable from one day to the next, you know?” said one dad. “I know! My tech funds are down when the Nasdaq is up. It’s crazy, right?” said the other.
These two disheartened dads making small talk could, unknowingly and unwittingly, be sending the wrong message to this young, future investor – who will likely be offered a 401(k) plan of his own years down the road.
So Who Taught You How to Mange Money?
Typically, parents – either one or both – become their children’s first “financial advisor.” They should set good examples, and should also speak more positively about the stock market and investing in general. This may prevent a 10-year-old from thinking: “So why should you invest in the stock market when everyone keeps saying how bad it is?”
Unfortunately, dads are not financial advisors and might not explain things as accurately as an advisor would. But, hopefully, they will teach their kids how to save money and how to invest it and explain that saving is not investing. By simple illustration, Dad can show how $100 invested at 10% in one year, for example, can become $110. And if the same thing happens again the following year, that $110 becomes $121, and so on, due to compounding, which he should also explain. For fun, he might even show them how they can double their money in seven years when the conditions are right.
The main advantage kids have with compounding is: time is their ally. Later on, Dad can make the comparison to dollar-cost averaging, where the same dollar amount is invested in the same investment usually over a period of time.
Looking back, kids from previous generations went to the bank with Mom or Dad to make deposits of however many coins and dollar bills they had directly into their savings accounts. They would hand over their savings booklet for the bank teller to stamp the deposit page with the date and the amount. The teller would then write in the new balance. To kids, this was exciting. “Wow! One hundred and ten dollars!” Parents made sure that monies earned from allowances and chores went directly into their savings account along with any birthday and holiday money.
Today, many kids have a huge money jar in their bedrooms filled with coins and bills. It is this kind of money that sits around earning zero percent that likely led toward the big push to encourage kids, starting at 8 years of age, to learn to research and invest in stocks with parental supervision. And it is because they won’t build wealth with a savings account.
Simplification is Key
You and I know the way to make money is to diversify your investments among a variety of securities at different risk levels. For example, some money should be in aggressive stocks or funds, so your money grows, and some money should be invested more conservatively, to provide stability in case of a market downturn. Most adults would understand this.
Clearly, it is too complex for kids – which is why little Johnny would never say, “My dad says that by having a portion of my money in stocks, bonds and cash, my downside risk is minimized while achieving necessary portfolio growth based on my time horizon and risk tolerance.”
And, to his credit, everything little Johnny said is true. He’s talking about his dad creating a strategy, and this is what our professional financial advisors and financial planners do at Hefren-Tillotson day in and day out.
Wealth is Getting Younger
Many of our wealthiest families have generated their wealth from hard working, risk taking, imaginative entrepreneur family members. Today, the younger wealthy is smarter and more tech savvy. Many feel they can do it all themselves.
When kids start investing early in stocks from companies they know, like and care about, they also learn while they are grow up that their investments have the potential to growing up with them. Hefren-Tillotson advisors have become productive stewards of wealthy families and provide them with financial literacy. Of course, no one can force children into investing, and investing in something they don’t have a true feeling for. Obviously, if parents (and teachers) can provide financial literacy it will be worth it to every child in the long term.
Ups and Downs are Normal, and This Isn’t the Early 2000s
We know past performance is no guarantee of future results. Kids should also know where we’ve come from to where we are:
· In 2001, the Dow’s year-end close was 10,021.05.
· In 2007, the Dow crossed above its intraday high of 14,198 to hit a record breaker.
· It then plummeted 54% over the next 18 months, bottoming out at 6,541 in March 2009. The Dow’s year-end close was 10,428.50.
· At the end of 2020, the Dow hovered around 30,000. It was neither without pain nor angst from the coronavirus. No one knows where it will go from here. But it will go.
Kids remember how many points LeBron James scored in 2020. They compare to what he scored in 2018 and will see progression or regression. It is not all that much different when relating to the stock market, depending on their perspective.