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Grooming the child investor: give your kids a head start in saving and investing

19 April 2016 in Investing Insights

April is Financial Literacy Month, and to mark this event, we will publish a blog series on topics related to financial literacy. Last week we published a blog about retirement and this is the second in our series.

Yes, it’s a cliché, but we just gotta say it: it’s never too early to teach Junior about investing. From creating a college fund to saving for those must-have basketball sneakers, getting kids to think about the financial responsibilities and growing their piggy bank can be an empowering and rewarding experience. To boot, there are lot of life lessons to be learned from investing, from the virtues of patience to the merits of discipline.

When parents teach their kids about investing, however, it often involves asking them to think of companies that they are familiar with and whether they would like to own a stake in them. The names that get kids’ mind share invariably run to brands like Disneyland, McDonald’s and Apple. Parents, this is definitely a great start, but you can go a step further.

Instead of picking single name stocks, you may want to nudge them towards picking ideas. There are many advantages to looking at the investing universe through trends and themes rather than through the lens of a single stock.

Why thematic investing is for kids

When we introduce kids to thematic investing – choosing stocks based on ideas, trends and themes – we have an opportunity to also educate them on so much more.

  1. Investing is not child’s play – there are thousands of stocks to choose from so where to start?First introduce the idea that there’s a big investing universe out there. If we’re just talking stocks, there’s something like more than 3,500 to choose from and that’s just U.S.-listed shares. So how’s a kid to choose a winner from this mega universe if adults can’t! This is a good time to let them in on the fact that investing is not about arbitrarily picking a stock just because they happen to have some experience with the company.

    When people pick one stock out of more than 3,500, they are essentially gambling with their savings (or allowance!) — unless they have researched that stock. And this is where you can tell them investing and speculating are two different beasts. It’s a dog-eat-dog world and the world of investing and trading is no different. Many investors try to find an edge by doing disciplined research and analysis and may be rewarded for that. Leave it to luck by arbitrarily picking a stock, it’s called gambling.

  2. Kids, invest in what you know and keep your eyes open for new ideas. Due to the sheer number of stocks out there, picking ideas and broad trends is a good way to back into the stocks for your portfolio.Where to find that idea? How do your kids spend their time when they’re not doing homework or in school? What are their hobbies? What do they care about?

    Besides video games, perhaps they also like to play sports? Or if they’re like most kids, they live to keep in touch with friends 24/7 on social media. Whatever it is, getting them to think broadly and to approach investing by merging their ideas, observations and knowledge may open their eyes to a broader world beyond that of single name stocks. It can also stretch their curiosity and spur them to ask questions. How do social networks make money? Are all of their friends on social media? What are they doing? Do they ever click on the ads when they’re reading their classmate’s posts? Are social media growing? Are they adding new users?

    Either way, log into our platform at motif.com and start building and customizing a basket of stocks together using their ideas and passion as a starting point.

  3. Discover investing ideas through the Motif platform.If junior is short on ideas, show them the Community Motif catalog where you can browse a whole big world of investing ideas, more than 180,000 in fact. Depending on their age, some of the motifs in the catalog should be relatable. For instance, the Child’s Play motif contains names that are popular with kids. Search on keywords that reflect your children’s favorite activities. For athletes, we’ve got the World of Sports motif. For your teenage shopping fiend who might want to finance their indulgences with some investment gains, check out the Hot Retail motif and the Couch Commerce motif.

Explain investing ABCs through the Motif platform

  1. Diversification and spreading the risk around.Another advantage to using the thematic investing approach is you can talk about spreading out risk through diversification. If your kid loves video games and had bought Zynga shares back in their heyday or they love Chipotle burritos and ate up their stock before the chain’s share prices went south, they would be hating you for getting them into the stock market. On the other hand, if they had diversified through the fast food or gaming motifs, they would have been able to spread the risk by putting their eggs in multiple stocks.
  2. Run through a few of their favorite motifs and talk through the various investing dimensions shown on our platform. A few things you can discuss using our platform:
    • Performance charts. Many of the motif performance charts tell a compelling story – show long and short-term performance charts. If they are patient enough and can stomach a roller coaster ride, they just might be able to grow their piggy bank.
    • Volatility. While this is not a measure of risk, it is a reasonable indicator. Risks are the things that investors worry about. If your kids fancy iced coffees and want to own the Caffeine Fix motif, and let’s say coffee bean prices are rising, that’s a fear (risk). Arguably, investors may fear volatility because big fluctuations can signal that investors are unsettled about a risk.
    • Weightings. Once your kids have chosen or helped build a motif, show how they can move the weightings slider to get a desired allocation for the different stocks in the basket. Here you can explain the concept of making portfolio allocations that reflect their risk appetites.
    • Bull and bear cases. They will also want to think about bull and bear cases for each motif – under what conditions would the motif do well or poorly? What are the current conditions that may support a bull case?
    • Valuation. Talk to them about how stocks are valued and how “expensive” stocks that cost more than $50 a share may not be expensive at all when you look at how the broad market is valued using a metric like price-to-earnings.

So there you have it, a starting script for talking to your kids about investing. Can you think of a better way to bond with the apple of your eye? If so, share your tips on how you’ve managed to get your offspring to get their heads around investing.

Investing in securities involves risks, you should be aware of prior to making an investment decision, including the possible loss of principal. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector. Investments in ETFs can include those with a narrow or targeted investment strategy and can be subject to similar sector risks than more broadly diversified investments. Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.