Learn how to teach your child about Investing. Learning financial concepts, basic economics and investing strategies can be a family activity.
In this world of financial turmoil, wouldn't it have been great if our politicians had been taught by their parents that they shouldn't over-spend and they ought to invest in their own future?
It is vital that kids be armed with the necessary investment knowledge so that they can make safe, educated decisions as adults about their own financial well-being.
Investing as a Family Activity
Parents in the normal course of their daily activities should discuss personal finance with their children. Starting with simple explanations to toddlers when supermarket shopping, explain how you decide which items you choose to buy, is it because of quality, discounts etc?
For older kids, you can explain household budgetting and basic economic concepts like supply and demand. Over time, you can move on to portfolio creation and asset allocation. Your child may not understand everything initially, but with patience, they will learn these important concepts.
If you are running a business, explain how you go about your day doing what you do. Hong Kong billionaires like Li Ka Shing groomed their children from a young age by exposing their children to the daily ins and outs of their businesses. Who better to teach your children than the most qualified teacher around? YOU!
My husband who is a doctor takes time to teach my children basic medical knowledge whenever they fall sick (which is pretty often). Don't ever under-estimate the intelligence of your child. After we explained to my 3 year old daughter that the Golem in 'Lord of the Rings' was suffering from Schizophrenia and having delusions, that's why the 'good' golem was talking to the 'bad' golem. She not only remembered this, but several months later, while watching 'Pirates of the Caribbean', she diagnosed Captain Jack Sparrow with Schizophrenia on seeing him conversing with himself.
Risk and Reward
Explain to your child Risk and Reward, that Risk is the possibility that an investment will lose some or all of its value. Reward is the percentage of gain that your investment experiences over time - the return on investment or ROI.
Teach your children about the various financial instruments : Stocks, Bonds and Debt. Stocks or Shares are variable risk, variable return investments. They are generally considered unpredictable, higher risk and higher return than Bonds.
Government or Bank Bonds, a form of debt, are safer financial instruments (or used to be, before the Greek crisis!) which provides lower but guaranteed returns. Company bonds are somewhat more risky. Higher risk should necessitate a higher return to the investor. However, you should also explain that not everyone is honest and even CEOs and Heads of governments lie about the financial state of their company or country.
Maybe you can also explain how some governments and companies have spent beyond their means and so have issued excessive amounts of debt to finance this over-spending. This has led to a huge accumulation of debt which now requires sacrifice by the current and future generations to get it under control.
You can interest your children in the companies that you invest in or work for by showing your child more about the companies, including how much they earn, what they make and how many people work for them. You can print out information about the companies from the internet.
Ask your child to select a company to invest in or guide your child in choosing one, perhaps a blue chip stock is best. If you have the funds, maybe you can buy the stock and track it with your child. If not, make an artificial portfolio and track the share for fun. Explain how to 'Buy Low and Sell High', how timing your stock buy is important. Show your child that the stock market goes in financial cycles. This understanding will prepare them for riding out market fluctuations and making informed decisions when others panic.
Teach your child how to file his financial and banking information. When your child is older and has been diligently saving up his money, you may want to let your child buy his own stocks if he is interested in investing. Teach them about Diversification of portfolios by investing one third in the bond and stock market each and a third to be left in his savings. This also allows the child to compare the performance of each category of investment against the interest from his bank account. This is a fantastic motivation for your child to learn how to manage his own earnings in future.
With your guidance, when your child makes real decisions and takes real risks, your child may lose money, but the purpose of this exercise is to familiarize your child with investing. Show them that Investment has its advantages and disadvantages.
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