I can vividly remember the first explicit lesson I had on the power of compound interest. Mr. Bosley, my 9th grade Social Studies teacher, gave our class a quick explainer on why investing early and often was better than getting a late start. Because Mr. Bosley was a believer in making lessons feel personal, the two investors he chose were named after students in the class. There was Emily (that was me!), who got started early, and Joe M. (my classmate from kindergarten through 12th grade), who waited to invest.
In our classroom scenario, Emily invested $150 per month starting at age 18 and stopped at age 40. Joe, on the other hand, didn’t start investing until he reached age 40, and put aside $1,000 per month. They both hoped to retire at age 65 to live off their investments.
Assuming a 10% annual return, the astounding fact was that Emily, even with a much smaller monthly investment and only setting money aside for 22 years (from age 18 to 40) would have $1,392,530 compared to Joe’s $1,180,165 at age 65. (And no, I don’t remember those figures from way back when. I did the math here.)
Way to go, tiny investor Emily!
If only the lesson had stuck. While I certainly remember that class and appreciated the startling financial difference between an early vs. a late start, what I mostly took from this lesson was a sense of vague guilt that I should understand this stuff better.
(To be fair, vague guilt about something that is no way my fault is kind of my jam.)
But my understanding of compound interest felt unrelated to any kind of real world action available to me, because investing itself seemed completely alien. Yes, even though my dad was a financial planner, the specifics required to invest one’s money was to me an enigma wrapped in a mystery topped with a sprinkling of confusion.
Did one just call up the Dow Jones and ask to purchase a stock?
Was there a mutual fund store where you could find attractively-decorated gift baskets of appropriate investments?
Was it necessary to speak fluent Nasdaq when conversing with fellow investors, and did it sound anything like Klingon?
Would one be required to fight the bull and/or bear to access your funds?
(The answers to these questions are not exactly; nope; not necessary and only if you really lean into the consonants; and the animals are purely metaphorical and no one knows for sure why we use them to describe the stock market, in that order).
It took me quite some time, even after I began my career writing about finance, to feel confident with investing. Which is why I want to make sure I teach my kids the mechanics of how to invest, rather than just the magic of compounding interest. Here’s how we’re teaching them.
Start with What You Know
Warren Buffett has famously advised investors to only invest in things they understand—advice no one currently invested in Bitcoin or Dogecoin has followed. However, it’s an excellent place to start investing because understanding a company or industry means you’re in a good position to determine if it is likely to grow or shrink. When you know something well, you’re more likely to follow news about it, recognize when conditions for it are improving or declining, and understand how it reacts to changes over time.
For instance, my husband is an automotive engineer by trade, which not only means his work is more likely to catch fire on any given day than mine, but also that he has very well-informed opinions about everything from new government regulations on emissions to technological innovations from various automotive companies.
His deep knowledge of the internal combustion engine means he can generally recognize how car companies will fare financially in response to (or in advance of) various changes.
You might think that a 10-year-old and a 7-year-old can’t possibly have the same kind of expertise, but if you’ve ever been cornered by an enthusiastic child who wants to tell you about dinosaurs ad infinitum, you know that is simply not true. Kids know a lot about a lot of things, and often things that their parents are clueless about. (Just this morning, I was exasperatedly corrected when I referred to my younger son’s Tobot as a Transformer.) So, it is entirely possible for kids to invest in companies that they understand well—or even better than their decidedly non-with-it parents.
To help the boys understand the importance of investing in what you know, we recently asked them to come up with a list of all of their favorite things in the world.
We made this very quick list one Sunday afternoon and let it be for a week. We didn’t want to overwhelm the kids with too much information. Instead, we just had fun making a list of all the things they like best in the world. We saved the next part of our investing lesson for the following week.
Finding Publicly Traded Companies
The next Sunday, we asked the boys to each pick two of the items on the above list, and we’d figure out if there was a publicly traded company behind those favorite things in which we could invest.
7yo chose Batman and toys.
10yo chose Pokémon and Pup Academy.
It was time to do a little Googling. I looked up Batman to see who currently owns DC Comics. I discovered DC is owned by WarnerMedia, which is owned by AT&T, which is about the least sexy parent company possible for the caped crusader. But, Animaniacs and Teenage Mutant Ninja Turtles are also Warner properties, meaning investing in AT&T covers several of 7yo’s favorite cartoons.
Since toys is a pretty general item, we chose Mattel toys as the publicly traded company to look into.
As for Pokémon, it is owned by Nintendo, which is also somewhat within 10yo’s knowledge wheelhouse, since he is also a fan of video games.
Finally, Pup Academy is a show on the Disney Channel, and is owned by the House of Mouse. The good news is that Disney owns several items on the kids’ favorites list, including the Muppets, Octonauts, and Mickey Mouse
So far, so good. We’d found the publicly traded companies that owned four of the kids’ favorite things, and we were ready to INVEST!
Buying a Single Share of Three Companies
We fired up the ol’ Robin Hood app—which I do not necessarily endorse.
(The short version of my RH rant is that one should only use it for money that one is comfortable losing, which is how we roll. It’s no different than any other game with in-app purchase options, in that you need to think long and hard before you decide to spend money in either one. That said, Robin Hood can be a good learning tool in the right hands.)
We wrote down the share prices for each of four companies and then started making some decisions. (Note: my husband and I are financing this experiment and we were willing to invest up to about $250. We ended up investing a little more than that. But we consider it money well spent for a long-term educational project.)
We decided to purchase one share each of Nintendo (at $74.05 per share), AT&T (at $30.02 per share), and Disney (at $187.50 per share).
Analysts were suggesting that Nintendo was a savvy purchase, and we expect Disney stock to go up as the resorts reopen, which was why we chose those two stocks. Then we asked 7yo, who had chosen AT&T and Mattel, which stock he would prefer to own, since neither were a clear winner. He chose Batman, i.e., AT&T.
That was several weeks ago, and I am writing this on the same day that AT&T has announced it is spinning off WarnerMedia to merge with Discovery, creating a giant new media company that our corporate overlords will use to keep us addicted to screens. (Did I write that out loud?)
Today’s news about AT&T and Warner will be part of next Sunday’s weekly meeting as we discuss our investments and plan our strategy. Will 7yo want to invest in Discovery now? (I already know the answer is yes, because his love of Batman is deep, abiding, and long-lasting. The kid is nothing if not loyal.) Will we want to also keep our AT&T stock? How do we think this news will affect both AT&T and Discovery’s stock?
It’s in asking these questions and revisiting our stock portfolio (such as it is) that I hope the kids learn how to make decisions and feel confident about their investments.
Long-Term Investing Practices
At each of our weekly meetings (which we also use to go over schedules for the week and plan fun activities), we take a moment to look up the current stock price of each of our three investments and write it down in a book. So far, the changes have been extremely slight. But keeping an eye on our investments is an important part of the process, although a weekly check-in may be too often.
However, we’ve also been recording any information or news we hear about the companies in our investment book. This is where we’ll record the news about AT&T’s sale of WarnerMedia.
I have noticed that 10yo, at least, has been keeping an ear out for new information about our investments. In the car on the way home from swim lessons the other day, a commercial for AT&T’s phone service played on the radio.
“Hey!” he cried from the back seat. “They’re trying to raise their stock price!” (As a competitive big brother, he took it a little hard that the company that he thinks of as 7yo’s investment was making commercials for its services.)
After I finished suppressing my laughter, we had a nice conversation about exactly what AT&T does, how advertising fits into their business plan, and if radio commercials could have an effect on stock prices. (They did not appear to that week.)
Ultimately, this was exactly what I wanted the kids to be doing: recognizing how companies interact with consumers and how that might affect investors. Listening for new information about publicly traded companies will help us decide our investment strategies.
Comfort Breeds Confidence
We have been taking 10yo to weekly or twice-weekly swim lessons since he was 3½. The child swims like an eel, which never fails to amaze me, since I never quite learned how to swim. His swimming skills are a clear demonstration of how repeated actions bring about confidence and mastery.
Confidence and mastery of investing are what I’m hoping instill in him and his brother. A one-time lesson on the power of compound interest can certainly stick with you over time. But it doesn’t give you the day-in-day-out comfort with an otherwise intimidating process.
That’s why we’re trying to make investing a routine part of our week. We’re showing them how to invest in the things they know, how to make decisions with finite resources, and how to make changes to their investments when new information is available. When investing is just as much a part of their weekly routine as packing a swimsuit and heading to the J, it loses its intimidation factor and simply becomes something they know how to do.
Here’s hoping that spares them the sense of vague guilt their mother experienced!
How are you teaching your kids about investing?