How to teach your children to invest

Starting up a portfolio for your children might be one of the best things you can do for your children. But how should you go about it?

We all had some hobby or other when we were young. For me, it was collecting NBA cards. It was a seemingly innocent pastime that taught me a great deal, energising me to find out more about the subject and even teaching me a few life lessons that I’ve come to see as very valuable.

Whilst NBA cards were great, a hobby that offered an introduction to investing would have been even better. The sooner we start investing, the better we’re likely to get at it and the higher the chance we have at reaching our retirement goals. The question is how to go about introducing young people to investing without scaring them off.

We recently were asked through our Q&A service whether it is possible for parents and grandparents to invest on behalf of their children. Not only is it possible, it’s a really good idea.

Banks are offering rates of around 2.5% on many of their children-focused accounts. But the dividend yield of the ASX 200 is currently around 4%. That small difference in rates can make a big difference to returns.

Thanks to the magic of compounding, $1000 invested at 4% for 18 years would be almost 30% higher than if the cash was left in a bank account paying 2.5%. And this figure ignores the potential for capital gains as well which would boost the return even higher.

Great lessons

It isn’t just the bank balance that will benefit your kids. By sitting down and teaching them about what you’re doing you will help accelerate their learning about such things as personal finance, savings, business, economics and even maths.

Do this in the right way and it may trigger their interest that might encourage them to learn more about the businesses they now own. For example, if you bought them Woolworths (ASX:WOW) shares, the next time you walk into your local store they might pay more attention to how the business makes money than just rushing to the biscuit aisle.

Getting started

Unfortunately, starting up a portfolio for your children is complicated. You can’t just open a brokerage account under the name of a minor. Instead, you’ll be required to set up a ‘trust’ account under your own name where your children are listed as the beneficiary. The stocks will be legally owned by yourself but your children will be the beneficial owners.

Once they reach 18, they will be able to open up their own brokerage account and transfer the shares from the trust to their own account. There may be tax consequences, too, so it is wise to talk to a licenced financial professional who can advise you of your options.

Start small, buying companies with which your kids have some familiarity. Retailers, banks and every kind of logo that has some visible presence are good places to start. Those that pay dividends are good, too, as this will help break the tendency for new investors to focus on the share price rather than profitability and value. As with every share purchase, let value drive your decision about which shares to own rather than familiarity. That’s a good lesson for them to learn from the outset.

So, rather than collecting trading cards or stamps, encourage your child to collect real businesses instead. That will help them to learn at an early age many of the skills and lessons about money that many adults struggle with.

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