5 Investing Basics You Should Teach Your Teens ASAP

5 Investing Basics You Should Teach Your Teens ASAP
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You may not even realize it, but you’re teaching your kids financial lessons all the time. His children monitor his attitude toward money and the way she handles it in her everyday life more closely than she thinks. And these behaviors will impact your future relationship with money. Investing, however, is one of the topics that is barely mentioned at home, let alone taught in schools. And given how accessible it has become to the DIY investor, it might be wise to teach your kids some solid fundamentals.

Here, I discuss five key investment basics you should teach your teens before they leave home.

1. Start with the basics

Investing can seem extremely complicated at first. Jargon alone could make young people question their decision to learn about investing and finance. So try to help them understand investment terminology by starting with easier concepts and progressing to more challenging ones. Try to break down complicated words and topics and provide illustrative examples.

You can use a game-like format where you ask them questions and earn rewards for each correct answer. This will solidify their conceptual understanding of investment basics early on and lay a great foundation on which they could build.

2. Use the brands your teens are familiar with

If you want to teach your kids key investment basics, challenge them to build a portfolio of companies they’re familiar with. Then ask them questions about certain consumer behaviors that have influenced their choices. Initially, they can start with their own preferences of clothing brands, technology companies, and streaming providers.

In this way, it will stimulate them to look for trends that generate demand for new products such as ‘green’ technology, healthy eating and much more. Again, have them think about how these consumer needs might affect their investments now and in the future. In this way, they will get used to being attentive to the signs that could lead them to the next big event.

3. Diversification is key

Be sure to discuss the old expression about not putting all your eggs in one basket. You want to impress upon them that portfolio diversification they could protect their investments by placing their eggs in several different baskets. Once they understand the basics, you can move on to allocating capital across different businesses, industries, and geographies.

And while diversification might help reduce risk, make sure they also recognize that it won’t automatically protect them from loss or guarantee a profit.

4. Buy and hold

Teens may think of investing as a game where they can make a profit at the click of a button. It is your responsibility to teach your child that this is not a game and that there are real risks involved.

Short term, the markets could go up and down in a rather unpredictable way. However, in the long term, markets have historically moved higher. Then. Regularly investing in quality businesses and holding onto them for years has proven to be a successful strategy for investors like Warren Buffett. It is important to be transparent with your children. Teens need to know that success is not guaranteed.

5. How Compositing Works

It is important to teach your children how capitalization works. This is because they have the gift of time, which means they can invest for many years. This way, they can smooth out any market volatility and give themselves a chance to make a profit.

Encourage them to find an online compound interest calculator and play around with it. Also try to introduce them to practical tricks like the rule of 72, a simple formula that could help them determine how long it will take them to double their investment (72 ÷ interest rate = years). For example, let’s say you’ll earn a 7% annual return on your investment. They can then take 72 and divide it by 7, which will show that their initial investment will double in about 10.28 years.

We have tons of helpful resources, including our investment basics guide which is a great place to start.

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