Get Someone Started on a Lifetime of Investing
May 27, 2009
My 15-year-old grandson called me the other night and asked if he should open a brokerage account now that the market is so low. (He has $100 to invest.) What should I tell him? Thanks!
Someone must be doing something right with this teen who not only wants to invest $100 rather than spend it—but who knows that the market’s decline could signal a good opportunity to buy stocks. I would absolutely encourage and support him. You’ll be starting him out on a lifetime of investing, and what he learns with this modest beginning could pay enormous dividends in the years to come.
Getting started should be easy. Because your grandson is a minor, he will need an adult (most likely either you or a parent) to open the account and act as its custodian until he reaches the age of majority (typically 18 or 21—or up to 25, depending on his state). I’d also like to point out here for the benefit of others that if large sums of money are involved, custodial accounts may not be the best option given tax issues and college financial aid—but small accounts offer a fantastic way for young people to get their investing feet wet.
Strategy and Tactics
Once the money is in the account, it’s time to invest. Here’s where the real learning (and the fun) begins. I’d start by explaining the fundamentals of building a portfolio. Explore with him the importance of establishing goals, which in his case will probably be pretty simple: long-term growth. Discuss the critical need for diversification (though as I’ll explain below, diversification may not be a big concern in a small portfolio). Teach him about asset allocation and dividing his capital among equities, bonds, and cash (again, not super-critical for a portfolio of $100, but something he’ll need to understand in the future). Explain the different ways to create a portfolio: buying individual stocks or investing in mutual funds. And finally, talk about the risks inherent in different types of investments, and the risk/reward tradeoff.
Instead of spending a lot of time trying to pick the "right" investment, I would instead focus on investments that will whet his desire to know more about the markets, investing, and personal finance. (If he was 25 and had $1,000 or $5,000, I might offer some different suggestions. But with $100, I think the goal should be to make investing fun and interesting.) There are a couple ways he could go. A more conservative approach would be to buy a mutual fund. Another option would be individual stocks. Even though he doesn’t have enough assets to build a truly diversified portfolio, and transaction costs will eat into his capital, it might be more fun to buy even a couple of shares in a few companies. I’m sure he can come up with several companies that might hold a personal interest for him, and even buying one or two shares will intensify that interest.
Urge him to follow his investments and the markets, and be a resource for him if he has specific questions. There is an entire universe of information online about these topics, and if he gets into it, he can really prepare himself for his financial future. And it might encourage him to save and invest more. Another great way to spur him on would be to match a percentage of his new contributions.
I was so pleased to get your question! I wish more young people would demonstrate an interest in investing, and I wish more parents and grandparents would encourage it. Tell your grandson good luck from me, and I hope he turns into a real investor.
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