Better Investing - Youth Investing

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Youth Investing

Spelling Out the Basics

by Angele McQuade

Many teens would consider spending an entire weekend in June lounging poolside in sunny Southern California a vacation fantasy. But spending that weekend in a meeting room on the other side of the window from the pool and learning about cash flow and budgeting with adults isn't exactly at the top of every teen-ager's summer vacation wish list. So why was a roomful of youths in this situation smiling instead of scowling?

Either these aren't your typical teens or this experience wasn't as terrible as it might sound. The youths and their parents or other adult relatives were attending the newly redesigned Family Youth Program at NAIC's CompuFest in Anaheim, Calif. Throughout the weekend the teens joked with their tablemates while working on joint assignments with their accompanying adults on something called The Game. Enthusiasm was evident on faces around the room.

What prompted the frequent exchange of smiles between these teen-agers and adults? Was this educational experience just a fluke, or could it be emulated by other adults and children in their own homes? The answers to these questions rest in the creative, interactive program that turned adults and teens into investment education partners and offered many lessons for any adult who wants to teach money management skills to the youths in their life. By combining strategies from this program with expert advice from other sources, teens and adults can make educated decisions and develop a teen-appropriate investment plan of their own.

Start With the Basics

When adults are also investors, it's natural that they'll want to pass along their investing knowledge to their children or grandchildren, nieces, nephews or any other important youngsters in their lives. Figuring out where to start and what to teach can be daunting tasks, however. Today's teens have access to a wealth of information and resources; with a little help from supportive adults, they can become familiar with the basics of financial responsibility before they even leave home.

By teaching teens money management skills before they're flung into the grown-up world of credit cards, mortgages, car payments and taxes, parents and other adults might set them onto a more stable financial track and encourage fiscal responsibility that can pay tremendous dividends later in life. If you're interested in teaching youths about investing, it might be best to start with money management basics and then move into investing after they learn these concepts. That was the approach taken by Diane Graese, a director of the NAIC Computer Group Advisory Board, and fellow Family Youth Program organizers, who made The Game a central part of the program.

The Game was a weekend-long life simulation activity in which the teens and their adults worked together to apply the personal finance lessons to realistic budgeting, saving and spending scenarios. An occasional financial crisis was tossed into the mix, leading the partners to consider financially responsible ways to deal with it.

As The Game was well under way, Anna Nguyen and her father, Ky, of California eagerly leaned over their materials. The smiles shooting back and forth between them as they worked confirmed that not only were the financial lessons sinking in, but they also were having an awfully good time learning together. Anna was happily putting what she'd absorbed about money management to use in her Game activities. Anna and the other teens were introduced later to the basics of investing, with the idea that the adults and teens could continue this more advanced part of their education after they returned home.

Crafting a Plan of Action

If you're interested in creating a similar education program at home, you can follow the same model: Tackle the money management basics first before moving on to investing. Teens starting to invest "should first take the time to learn -- perhaps by reading one or two books on investing," says Selena Maranjian, co-author of The Motley Fool Investment Guide for Teens. They should also spend time on financial Web sites and develop confidence in how they plan to invest before they start "throwing money here and there," Maranjian says.

"A good first step is a mock portfolio where you don't even invest any real money," she says. "Allow yourself a few hundred or thousand dollars and then divide it among those companies you want to invest in. Watch how your stocks rise and fall over time. Remember, though, that the long run is what counts, and even good companies and stocks can behave in a wacky fashion or hit a temporary slump over a short period."

After practicing with a mock portfolio, you and your teen can discuss opening a custodial stock or mutual fund account so that the teen-ager can make actual investments. Family investment clubs also offer a safe place for teens to start making actual investment decisions.

"Setting up a family investment club can be an excellent vehicle for getting both old and young involved in stock investing," says investing father Phil Wax of Portland, Ore. Whether investing in stocks or mutual funds, motivated teens can learn to analyze their investments with an adult's assistance and support. You may want to supply the initial investment money, but it's a good idea for teens to save and fund their own accounts as well.

How Much Risk?

Once your teen has decided to start investing, other issues come into play. Conventional wisdom says that the longer your investment horizon, the more risk you can theoretically take in your portfolio. Because youths should have several decades before they retire, any investments they make at a young age have the opportunity to grow through compounding over a long time. Even a seemingly insignificant amount of birthday money saved and invested responsibly could grow astronomically by retirement age.

Starting young also means that teens might consider taking more risk with their investments than adults closer to retirement age. Their time horizon is so long that even if they make mistakes, they'll have time to learn from them and apply their new knowledge to fixing and even improving on any disappointing portfolio results.

"We all know the compounding examples that tell us the most important thing is saving early in life and then getting our money working," Diane Graese says. "Teens have a lot of ability to recover (from investment mistakes) as they have a lifetime ahead of them."

Not everyone agrees with the conventional wisdom. Teens have such a long investment period that what they do in the first few years is even more important than the choices they make in later years, Wax says.

"Youth should use the longer timeline to their advantage," he says. "This isn't about cute little growth charts; it's about the real difference in wealth when you are 50 or 60 years old. The compounded value of those early years at almost any assumed growth rate is too important to risk. So I advocate starting early and conservatively. Invest long-term and conservatively when you are young and you'll be able to take (bigger) risks when you are older."

Spending Time. From left, Lucas Bischofberger, Christopher Ballard and Samantha Jave consider their options carefully before spending the money they've accumulated during an exercise called The Game at CompuFest. Helping them is Lucas's mother, Debbie Amandoli.

Ellis Traub, creator of NAIC's Investor's Toolkit software, author of Take Stock and an active advocate for youth investment education, takes a different view of the risk issue: "Investment risk is probably not that much of an issue among teen-age investors. Most who have genuinely taken an interest in putting their money to work begin with an appreciation of that money.

"It's likely they will have worked to earn it, so they won't want to lose it. The real issue may be the willingness of young people to jump in and try investing when older folks are intimidated by the mystique." Learning to cope with the risks of investing can work in a teen's favor, since those who "play it safe" and don't invest at all are accepting the very real risk of much lower returns on their savings over their lifetimes.

Silent Auctions

Toward the end of the CompuFest youth program, The Game became even more exciting as the teens and their adults participated in silent, closed-bid and live auctions with the money they'd accumulated over the course of The Game's exercises. Iowa teen Samantha Jave was especially proud of the copy of Investor's Toolkit software she won, handing it over as a gift to her father, Dave, to use in his own stock selection research. Samantha thought The Game was a lot of fun, although she had a feeling that real-life budgeting and saving wasn't going to be quite as much fun as the simulated version.

Brittany Meador of Texas expressed some surprise at how limited the amount of Game money she and her mother, Lori, had left over after paying their Game expenses. "Money doesn't grow on trees, does it?" Lori says with a satisfied smile, making it obvious that the adults playing The Game were just as happy with what the teens learned as the teens were themselves. "The kids learned that in order to have money, you have to plan. Brittany was amazed at how crises can happen and that you can never be prepared for them. This program was really educational for the teens."

Lori was also pleased with how her daughter was already applying the lessons she learned. Although Brittany has been an investment club member for years, she still learned a lot from the CompuFest program.

Partners. Brittany Meador and mother Lori take a quick break from the Family Youth Program to enjoy the California sunshine.

"Now that I'm back home and doing my clothes shopping for school," Brittany says, "I'm looking at prices and comparing to see how much better one is than the other. Everything I learned is beginning to come together. It seems like every day I'm using it more and more."

For Graese, the program was a resounding success. "Parents and youth were working together and having excellent discussions," she says. "That's the key thing we wanted to encourage. We expect to do the same program with a few tweaks at CompuFest in St. Louis next June."

Californian Lauren Hochman encourages other teens to consider attending next year's program. "I learned how to save money and the importance of saving," she says. "The Game expanded my horizons on how many bills and how much insurance you need to pay for when you're older. You can learn so much and then bring the information you learned back home and put it to good use."

Parent Dan Jave appreciated the teamwork aspect of the program. "More than once (my daughter) Samantha mentioned that she liked working on the assignments together," he says. "The class is a good look under the hood at what's involved in basic money management, the part teens seldom see."

Graese applauds adults who participated in the CompuFest program. "Teaching finances should really be the parent's responsibility," she says. "We wanted to equip the parents with content for at-home study so that the learning experience could continue there."

Adults who can't participate in a CompuFest program can still create a similar learning experience for the children in their lives. Everyday events such as grocery or clothes shopping can be transformed with a little effort into a lesson on budgeting or smart shopping.

Lessons Beginning To Click. Lauren Hochman puts her new investing knowledge to use in the computer lab.

Take your teen to the library to see what investment research materials are available. While you're there check out audio versions of books such as The Millionaire Next Door or The Wealthy Barber (see list, below), then listen to them with your teen in the car or while cooking dinner. These books and others may spark discussions about the impact that careful spending and investing decisions can make on one's financial future, even in the teen years.

You can create your own version of The Game by allowing your teen to make financial decisions for themselves as you teach them about budgeting so that their income covers their expenses. Give them freedom to make mistakes as teens and they'll be less likely to make the type of short-sighted decisions that could leave them in serious debt when they're out on their own because they never learned to say no or set limits for themselves.

"Allow your kids to fail a bit," Selena Maranjian counsels. "If they really want to invest in some hot company they've heard about and it's against your better judgment, allow them to put a little money in it. Often, the lessons we learn most effectively are the ones we learn the hard way."

Ultimately, what matters most is that you take an active role in your teen's investment education. Charlotte Mitchell intends to make sure she teaches her grandchildren about the importance of saving and investing as they grow older. "Anything we as parents and grandparents can do to help our children learn about the magic of compounding, investing for the long term and starting young," she says, "can be one of the best gifts we can give them."

Mitchell, of Kelso, Wash., and her husband, Bill, plan to start IRAs for their grandchildren. "We want them to know more about investing than we did when we were young," she says. "We're hoping that our IRA gifts will plant a seed that will grow into a lifetime of saving, investing wisely and -- most important -- we want them to know the great adventure of starting young.

"I'm hoping the interest (in investing) will come later when they say, 'Wow, I have that much saved?'"

Choosing an IRA

One potential investment vehicle often overlooked by parents of teens is a Roth IRA. Teen investors have at least one significant investment advantage over their parents: time. A 40- or 50-year investment time horizon maximizes the valuable benefits of an IRA for teens and young adults.

Underage investors with earned income are allowed to open and fund custodial IRAs, with contributions limited by the amount of income they earn yearly (up to the current maximum limit of $3,000 annually). A teen who has earned $1,500 working at a restaurant over the summer, for example, can fund an IRA with contributions up to that same amount. If the teen-ager is unwilling or unable to invest his or her earnings, parents or grandparents can gift an IRA contribution up to the earned income amount instead.

Because Roth IRA contributions are made with after-tax money, the contributions can be withdrawn before retirement without penalty; be sure to check IRS regulations for details. Teens will see the greatest return on their IRA investments if they leave them intact until retirement, but they may be more willing to put some of their earnings away if they know they can access some of it before then in case of great need.

Even when teens don't recognize the value of starting to invest toward their retirement, the adults in their lives often do. This older generation of investors may decide to start their younger relatives on the road to a secure financial future by funding IRAs for them. Mary Hoversten of southeastern Michigan is doing this.

"My son seems to find way too many things to spend his summer salaries on," she says. "But I have contributed to an IRA in his name (up to his earning level) for the last few years with the understanding that he will not touch this money."

A Bid for Education. Not yet old enough to formally enroll in the youth program, a few younger investors were still able to bid in the auctions at the end of The Game.

Pat Reed of Bucyrus, Ohio, opened IRA accounts for her grandchildren Jesse and Christie. "If the child is underage," Reed says, "you'll have to set up the account as a custodial Roth IRA and add only the amount the child earned during the year. We usually had to wait until the W-2s came in the spring, and then we invested for the previous year. We thought it best to have their mother listed as custodian, but it is possible for a grandparent to take that role. Some mutual fund companies don't allow IRA accounts to be opened with less than $1,000, so in Christie's case, we opened a Roth IRA through a bank, then rolled it over when she had enough for the initial mutual fund investment."

Ways for Teens To Start Investing

(Through custodial accounts, if underage.)