There’s an old proverb: give a kid some fish sticks and he or she will eat for a day. But teach them to invest in a seafood company, and, well, they might just earn enough money to buy their own fishing boat one day...and they might not.
That leads to their first lesson: risk vs. reward!
Before diving in to investing with your kids, it’s important to teach them the fundamentals. Easier said than done, right? You’ll have to peel them away from their video game or snap chat screens for a moment. But once they understand the basics, it can be a lot of fun.
Investing is essentially putting your money to work for you. But before making an investment, you have to consider the risk vs. the reward. That is: the chance it’ll lose value, compared to the chance it’ll go up in value. Oftentimes, riskier investments have a higher potential for reward. Likewise, lower rewards are often attached to low or no-risk investments. So, the first thing you need to decide is your risk tolerance.
The right investment mix of risk vs reward is different for everyone and often depends on your goals and age.
For example, a younger person may be willing to take more risks because they have many earning years ahead. Whereas, an older person who’s relying on their nest egg, may not be as willing to risk it.
Once you sort that out, you should give your kids a primer on ways to invest—there are stocks, bonds, GICs, RRSPs and so on. While you explain, try to frame each in terms of risk vs. reward. For example, stocks might be considered high risk, high reward. While most bonds would be considered low risk, low reward.
Another way you can mitigate risk is through diversification. That basically means: don’t put all your eggs in one basket; spread your investments around. So, even if one goes down, it’ll likely be balanced out by others that may have gone up.
Ok, great! You’ve covered the basics—now we can get to the fun part!
Tell them about some of your real-world investments and explain why you decided to invest in them. Then ask your kids what they would invest in? They might name a few companies that they’re familiar with, like Netflix and Twitter, for example. Ask them why they like these companies and why they think they’ll go up in value.
Next, make a game out of it! Have them put together a mini-portfolio of the companies they like (it’s important they chose companies they can relate to). Over the next few months, follow the stocks together. You can even make it a competition to see who can make the most virtual money over a period of time. There are plenty of apps that can help you track your stocks.
You might even want to consider giving them a small amount on money to invest, so they have some skin in the game (then they’ll really pay attention!). Even if their investments don’t do well, it’s a valuable learning experience and well worth it.
If they do show interest and aptitude, even consider printing out the quarterly investor reports and going through them together. Depending on their age, you might even want to call in to listen to an annual shareholder meeting. It isn't a comprehensive education by any means, but getting them interested early is the most important thing and will pay dividends in the future.
What fundamental concept should you always consider before making an investment?
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About the Author
Geoff Phillips has been helping Northerner’s reach their financial goals for over 20 years. With offices located across Northern Ontario, he currently leads a team that provides a member-focused approach to developing customized financial strategies. Tax efficient income and legacy protection with a focus on risk management allow members to pursue their goals.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities. Mutual funds and other securities are offered through Credential Securities Inc. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.