How Would You Tell Your Children To Invest?

I came across this topic on Tadas Viskanta’s Abnormal Returns blog last week, and I thought WSO would have some good responses. Here’s the question:

If you had a son or daughter just beginning to invest, what would you tell them to do to best prepare themselves for a lifetime of good investing?

He posed the question to a dozen well-known independent bloggers, and there were some pretty interesting responses. Here are a few of the best responses, followed by what I would tell my kids:

Josh Brown (Blog: The Reformed Broker) Buy shares in one stock, preferably a company they know about like Coke or YUM Brands – and read every filing, every news article for one year. This is how you learn what’s important and what’s just being written for the sake of having things to write about.

Roger Nusbaum (Blog: Random Roger) The stock market has a down year every so often and a few times the market will go down a lot and that does not have to be a problem. The problem would be panicking after it goes down a lot. People have always blown themselves up because they’ve misused leverage. This has always happened and always will happen. This can be avoided by not using leverage. Lastly keep it simple. Simple works.

Jay (Blog: MarketFolly) Take emotion out of the equation. If you can think and act rationally when others do not, that’s an advantage. Never stop learning… the best investors will tell you that investing is a continual education.

Rob (Blog: TechInsidr) Look before you leap. It’s absolutely critical that you are familiar with the numbers before taking a short or long position. Don’t make a single trade without reading 10-K / 10-Q filings and doing your research.

Brian Lund (Blog: Sober Look) Invest when it feels like the world is about to end. Stay out when everyone is talking about investing.

Tim (Blog: The Psy-Fi Blog) I’d get them to spend a year doing menial work to earn some money and then I’d tell them to think about how they’d feel if they lost that money every time they traded. Nothing helps to de-bias an investor more than a fear of failure and an understanding of what money really means.

Jared Woodard (Blog: Condor Options) Specialize. The parts of investing that any smart person can do will keep becoming more automated and commoditized over time. Good returns will require specialized knowledge and tools, so study quantitative disciplines and develop expertise in some important part of the economy.

Personally, I’d tell my kids to take it slow before jumping into the lion’s den. First, learn from others’ mistakes by reading books from some of history’s most successful investors. Then, invest a small amount in the market to understand how bad it feels to take losses. Finally, I’d warn them not to get too caught up in the hype surrounding growth stocks. That’s something I really struggled with when I first started investing. I’d tell my kids to avoid greed and leverage, and to focus on the business rather than the ticker symbol. Nothing really new, but that’s probably what I’d tell them. Option 2: Tell them to avoid the market and become an engineer.

Many of these responses seem common sense once you hear them. Maybe you have a more original approach. What are your thoughts on these responses? Would you tell your kids anything different?

The rest of the responses can be found here.

i'd tell them to stay away from short-term trading, because there's no way they'll be able to beat professional traders, and to stay away from individual companies and opt for ETFs instead.

Money Never Sleeps? More like Money Never SUCKS amirite?!?!?!?
 

Every 8-10 years another bubble bursts. Make sure you have access to a line of credit, and whenever the equity market loses over 1/3 of its value, lever up and buy ETFs. Sell when the market hits its previous high.

See Late 2008 for more info.

 
Tommy Too-toned:
Every 8-10 years another bubble bursts. Make sure you have access to a line of credit, and whenever the equity market loses over 1/3 of its value, lever up and buy ETFs. Sell when the market hits its previous high.

See Late 2008 for more info.

So you would have bought in July 1974 at 63, sold in May 1980 at S&P 123..... Just to buy again at S&P 1040 in July 2001? Terrible advice.

 

I would tell them to do what I do know.

  • Invest what you have
  • Invest periodically (weekly monthly, or bi-monthly) in a russell 3000 etf 80% of what you were planning to invest
  • keep the 20% in a high interest savings account
  • Invest 80% of your cash when everyone else is selling and most people you talk to are telling you that things are never going to get better (aka, RIGHT NOW)
  • Re invest all dividends and distributions

  • do that for the next 45 years, enjoy your life and do not worry about the money you put in. Just be disciplined and follow the 5 steps above.

 
Best Response
Unforseen:
I would tell them to do what I do know.
  • Invest what you have
  • Invest periodically (weekly monthly, or bi-monthly) in a russell 3000 etf 80% of what you were planning to invest
  • keep the 20% in a high interest savings account
  • Invest 80% of your cash when everyone else is selling and most people you talk to are telling you that things are never going to get better (aka, RIGHT NOW)
  • Re invest all dividends and distributions

  • do that for the next 45 years, enjoy your life and do not worry about the money you put in. Just be disciplined and follow the 5 steps above.

Can someone confirm? Sounds easy...gonna try it.
 

To me this is a bad questioned. I would never tell them how to invest to start with but rather have them invest in companies they like. The reason for doing this is if they like the company there's a better chance they'll fallow the company and how the stock is doing. Hopefully seeing the tend that if the company is improving so will their stock. As they mature I would start introducing things such as invest when people are selling and to protect themselves by diversification and buying high yield stocks. I'm not going to go broke if my kid messes up a messy 1k investment, but I will ruin their interest in the market and economics if they don't like what they're investing in.

You need to engage kids. You think they care that their stock has a high dividend? Or, rather that they own a piece of Disneyland?

Personal wealth is not how much you have in the bank or the worth of your portfolio. But, rather how you've used the wealth to make your life and those around you better.
 

I'd tell them to invest only with cash that they are not going to need in the near future, and then let them develop their own investing style and learn from their own mistakes.

 

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