Important Investing Concepts
The basics never change.
Our two cents
Investing doesn't have to be complicated. But before you start teaching concepts to kids, be sure you've covered the basics of investing for yourself.
When you do talk to your kids, you might want to explain the basics of stocks, bonds and cash. Then, to give your kids a solid foundation, be sure to discuss these points:
- Long-term investing—A longer time horizon helps you weather the market's natural ups and downs.
- Creating a strategy—Have your kids set goals and determine a comfort level with risk. Use this information to determine their asset allocation and then help them create a plan.
- The power of compound growth—Compounding can have a snowball effect as your original investments and the earnings on those investments grow together over time. The sooner your kids start investing, the greater the impact compounding will have, so it's important to understand the benefits of investing early.
- Risk and reward—Stocks, bonds and mutual funds are generally more risky than a savings account, but they can also provide the potential for a higher return.
- Diversification—It's risky to put all your eggs in one basket. You can minimize risk by diversifying, which involves spreading investments across stocks, bonds and cash investments, as well as across sectors, industries and company sizes.
- Monitoring results—When you invest, it's important to keep your eye on results and periodically compare investment returns with the appropriate benchmarks.
- Rebalancing—Asset classes and industry sectors perform differently over time, which could throw your portfolio's mix out of whack. It's important to teach kids about checking investments at least once a year.
- Give your kids real investing experience. Open a custodial account, and let them help select appropriate investments.This can be a very exciting experience.
- Open a Roth IRA. For teens with earned income, this can be a head start on retirement savings and show long-term investing in action.
Want more ideas? Get hands-on activities for every age.