Teaching Your Kids (and Yourself) the Basics of the Stock Market

You’ve probably heard the importance of talking to your kids about money and investing.

You’ve probably also heard about the importance of knowing a thing or two about the stock market yourself.

You might be thinking “How in the world do I teach my kids something I don’t know myself?”

Consider this… One of the most brilliant scientists in history, Richard Feynman, once said,

“If you want to master something, teach it.”

You don’t need to be an expert. You only need to stay one lesson ahead of your kids.

Plus, I’m here to tell you, you probably know much more than you realize. Even if you don’t, you may discover the basics of investing are not terribly complicated. The basics can be quite….basic.

Don’t get me wrong, things can become complicated very quickly, but I’ll walk you through how to get started teaching both yourself and your kids the basics of the markets.

Swimming Lessons

If you’re going to surf big waves, you should probably learn to swim first. That’s good advice, don’t you think?

The same goes for money.

Before you can ride the big waves of the stock market, you need to learn to save.

You can’t invest if you don’t have any money saved, right?

It sounds simple but learning how to save and invest money for a rainy day is LIFE CHANGING BEHAVIOR.

These aren’t math lessons either, they are BEHAVIOR LESSONS.

The math is SUPER SIMPLE. For every dollar you get, set aside a dime before you spend anything. If you don’t like a dime – pick coin. A nickel, a half dollar – whatever. Just do something every time.

IT’S THE DOING THAT IS HARD.

That’s OK.

People do hard things all the time. Sometimes what starts as “hard things” turns into life-changing habits.

Healthy eating, exercise, stress management, etc. It can be hard to do, but it’s probably worth doing.

“Eat your veggies, kids. Save a dime per dollar, kids.”

Learning to have the self-discipline necessary to save and keep cash helps build the mental fortitude necessary to weather market waves. “Markets take the stairs up, and the elevator down” is what the old-timers say. Things go wrong and risk happens quickly -- you have to be prepared to lose money if you are going to invest.

Prepare for things to go wrong.

Just like many modern day big-wave surfers wear inflatable life vests, just in case plans go awry, it is best to have a solid emergency fund in place before making long-term investments in the stock market. Your emergency fund is what keeps you floating back to the surface when either your life, the markets, or both are on the wrong side of crashing waves.

If you haven’t set aside enough cash for when the inevitable things go wrong in life, it can make you a bad investor out of no fault of your own. You may have to sell your stocks or bonds when they are down in value to address an emergency situation.

Also, people who can’t resist the temptation to spend every dime, don’t usually have much for savings. If you haven’t proven to have the mental fortitude necessary to save and keep some cash, you probably won’t have the mental fortitude to be a successful long-term investor either.

What about the kids?

Same goes for the kids. Teach them to save up an amount of cash as their “Emergency Fund” before they get to invest.

With both kids and grown-ups, it can help to have a goal in mind. Maybe that goal is to buy something or do something fun. Maybe the goal is a specific dollar amount.

Here’s how we sweetened the deal. We challenged our three kids to save $500, then we matched and let them invest the matched portion in stocks they chose. Other parents have done something similar but used smaller or larger amounts. These days, you can begin investing with a small amount of money thanks to fractional shares at some brokerage firms, so it doesn’t have to be a large amount to get started.

Do small amounts matter?

YES! Saving small amounts on a recurring basis can be EXTREMELY POWERFUL when combined with compound interest.

If you aren’t familiar with the topic of compound interest, and why Albert Einstein called it “The Most Powerful Force in the Universe”, check out THIS POST.

You’ll quickly see the POWER of saving early and often, even if it starts small. In fact, better to start small and soon, than to start late and large.

What Should I Buy?

This is where you can quickly drive yourself crazy seeking answers. The range of opinions is as vast as a very large vast thing. I’m not even going to try to compare it.

Let’s keep it simple.

First off, you can buy individual company stocks (more on that in a minute), or you can buy “funds” which will pool your money with other investors to buy dozens or even hundreds of stocks for you at once in one package.

Mutual Funds and Exchange Traded Funds (ETFs) are the most common types.

(Investopedia.com is a great source for looking up unfamiliar “nerd words”, by the way.)

What fund?

While the opinions can get loud here, as well, most would agree that buying a low-cost fund which tracks the broad market is a good way to get started.

An “index” is a group of stocks (or bonds or other investments) chosen to represent a particular part of the market. For example, you may have heard of the Dow Jones Industrial Average, the S&P 500, or the Nasdaq. These are each “indexes” representing a certain basket of stocks, and you can buy funds that mimic the return of the index for very little cost.

Unless you are quite comfortable analyzing and picking stocks, most or all of your investments money should usually be in some sort of diversified fund (or professionally managed).

It’s typically less risky to buy something that owns a whole bunch of stocks (like a fund), rather than buying one or a few individual stocks.

That being said, especially when teaching kids and ourselves, there is value in learning about, and maybe even investing a small amount of money in individual companies.

There is value in the process, even if you don’t “beat the market”.

If you choose to buy individual stocks, only risk an amount appropriate for your skill level.

If you don’t know your skill level, start small, or start on paper. There’s nothing wrong with “paper trading” to get used to watching the markets or individual stocks.

With our kids, we hold a family “stock picking contest” that has been a hit, and even inspired another dad (who sounds MUCH SMARTER THAN ME, by the way) to put his own twist on it.

Which stock?

This is what makes it easy to learn about the stock market with your kids.

Stocks are companies. Stocks are businesses.

Which stock do you want to own?

A good place to start, is to look for businesses you wished you owned.

Many of these businesses are part of you and your children’s everyday lives.

As you are shopping, eating, playing, living you lives with your kids, take note of the businesses you interact and transact with, and TALK TO YOUR KIDS ABOUT IT.

Talk to your kids about money as they grow up – talk about how much things cost in both their world and yours. But also talk about business. It’s happening all around you.

Many of our kids will own, run, be employees of businesses. All of them will need to interact and transact with businesses the rest of their lives. Understanding and recognizing good business practices makes them better consumers, citizens, and potentially investors.

You don’t need to sit down and take a class or read a book, do simple things like talking while waiting in line at your favorite burrito restaurant. Talk about things are going for the restaurant, about how much a burrito costs, and maybe even do some googling to see if it’s publicly traded.