I had a reader email in the other day with a seemingly simple question: what is the best way to teach your child to invest? This got me to thinking quite a bit while walking > 100 holes of golf this weekend (note: I’m not a golfer, but I do like hanging outdoors with friends, having beers, and my god is Bandon and coastal Oregon beautiful. Result – buying my first bag of clubs soon!) What is the best way to teach someone to invest?
My reader asked for input on this scenario, paraphrased:
I thought about giving my son, who is headed to college, $10,000 to invest. At the end of college, he could keep any gains, but would not be responsible if he lost the initial capital. Thoughts?
Hopefully this would teach your son to be involved and interested in markets. More than likely it would teach him how to take as much risk with OPM (other people’s money), since he has unlimited upside and no downside.
If he makes money? Lesson learned is that he is brilliant, and it is easy to beat the market. This could lead to overconfidence and bigger losses going forward.
If he loses some or all of the money, lesson learned is that markets are hard, likely he lost interest and/or started trading options, penny stocks, futures, or FX, and the real benefit of losing your own money (real physical pain) is mostly lost since the money wasn’t his to start with. Possibly the main result would be a strained relationship due to the embarrassment of losing his father’s money.
So, if this process isn’t ideal, what is? Well, I got to thinking about another idea. What if instead of letting your child run wild with the money without any guide, you gave him a different project. Some broad outline below, and I’m looking for feedback on the process, as well as the recommended reads to expand into a white paper or book, so shoot me an email!
1. Each semester his/her job is to read one book, explain in one page or less the findings, what it teaches, and summarize how to implement the process of the book in the real world.
3. You contribute $X to his IRA, brokerage account etc. The child implements the process of the book, and you review statements and chat over the updates at each sit down meeting (2x a year? 4x?)
The big pros of this process is that it teaches the child the process of investing rather than simply focusing on the dollar figure, which after four years will almost be entirely due to luck and the market environment (but more likely overtrading, fees, etc). Before I reveal my 5-10 books, let me hear yours.
As an example, The Little Book that Beats the Market would show the investor the benefit of investing in a simple, objective process for picking stocks, the benefits of a 12 month holding period for taxes, removing emotions, etc….whereas a book like the Ivy Portfolio would show the benefits of a global focus, broad asset allocation, but also how a totally different approach like how trendfollowing works….
What books or reads would you suggest?
