How to Teach Your Kids About Investing
I’ve been trying to find a practical way to teach my kids how to invest so they can experience the benefits of investing and be better prepared for the real-world once they leave home and go out on their own. Knowing how to wisely invest can free you to be generous in the future, and I want to guide my kids into wise living when it comes to finances. “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” (Ecclesiastes 11:1–2, NASB95).
I remember as a young teenager thinking about trying to get into a mutual fund, but I could never seem to be able to save the minimum $1,000 needed to open an account (my money always seemed to find other ways to be spent). But looking back I wish (as with anyone who has any knowledge of investing) that I had started younger so that I would have had a better understanding of investments in addition to the great benefit of beginning to receive compound interest at an earlier age (rather than starting in my late 20s).
So, how can I teach my kids how to save and invest their money? I could lecture on it (yeah, that would work well…). I could find some app to simulate what investing looks like. But what about actually letting them invest some of their own money (and maybe even helping get them started with some extra funds from Mom and Dad)? I mean, there really isn’t a better way to learn than actually learning by doing, right?
So began my search for a way to make this happen. My search led me to Wealthfront:
A great looking app, with some great options, but the problem was the $500 minimum to begin investing. My kids aren’t rich. And then looking at their average 5-year annual return of 8.40% shows some of the weaknesses of their portfolios. Not that those are horrible returns, but I know you can do better (because I have!). I want my kids to learn the benefit of not being led by your emotions in investment and how even in a downturn, holding normally results in a higher return than trying to predict the market and pulling out and re-entering at the right time. Wealthfront mitigates some of the volitility of the market through diversification, but at the expense of long-term results. And then there’s a fees. Seems like a good deal on the front end (free under $10,000), but as some have pointed out, the fees really add up later (and some now). And as far as the tax-loss harvesting feature, it doesn’t really apply to me or my kids. Because tax-loss harvesting actually doesn’t really benefit anyone unless they are saving $23,500 per year ($47,000 per year for a couple). And we’re not. Plus, there isn’t any way to invest in a specific stock, which I thought would be a great idea to help my kids be interested (what kid wouldn’t want to own a little bit of Disney?). So Wealthfront just didn’t seem to fit the bill.
Then I found Betterment, which actually came really close to fitting the bill.
They don’t have a minimum investment. And their returns seem quite good (5-year 11.6%). But then in the real-world, returns actually don’t seem that great (some even saying a 5-year average of 6.46%). So why the discrepancy? Plus you are pretty limited in choosing what you want to invest in. And coming off a year in 2017 where you could pretty easily have made 40% if you were in the Tech sector, and upwards of 30% with an agressive but diverse mutual fund, it’s hard to swallow something less. Volatility isn’t something to be afraid of if you are in it for the long-term gains. And that is what I want my kids to experience. Extreme volatility is fine when you don’ t need immidiate access to the money you invested — you are looking for long-term awesome results. And the fees are still there, 0.25%, on top of any ETF fees. And when my kids are just investing a small amount, I want to minimize the fees as much as possible. So I kept looking.
Then I came across M1 Finance.
It’s pretty new to the game (started in 2015). And on the surface, it looks like just another Weathfront or Betterment. But as I began to dig deeper it really separated itself from the competition. First, there is a minimum deposit to begin investing ($100), but it’s small enough that it is doable for my kids (with Dad and Mom’s help). Second, they don’t charge fees. You still pay normal fees for certain funds and ETFs (no way around that), but this is by far the cheapest both now and for the future of these investments. And the kicker is with M1 Finance my kids can buy stock in specific companies they are excited about (hello Disney!). This will enable me to help show my kids the difference between investing in specific stocks (non-diversified) verses a sector fund (which is more diversified) so they can learn the risks, benefits and downfalls of both. But already my son thought it was really cool that he could own part of Tesla. And all for FREE! How does M1 Finance do this? They’ve decided that the future of personal finance is free and they choose to make money in other ways (like lending securities they hold, interest on cash held in a brokerage account, extending credit through margin to customers, and getting paid for distributing certain funds or to transact on various exchanges). This is awesome. And guess what? The returns are awesome (trying creating a new portfolio pie with Aerospace & Defense, Retail, and Tech sectors and take a look at that sweet 58.17% for 2017, and then maybe experience some higher negative volatility like the drop in late 2018 but then experience the bounce as they are up 12.46% for the year, but it’s all a great lesson!).
So what are you waiting for? Go and open an account and start a portfolio for each of you kids, and yourself! If you’ve appreciated this blog post, you can sign up through my referral link here and get $10 to invest for free (I only signed up as an affilliate AFTER I felt that M1 was truly the best option), or you can just sign up without it here.
UPDATE: You can also check out some other investment pie strategies here: Fee-less Investment Strategies with M1 Finance
In the comments section, share some of your own experience for what you have done to help educate your own kids in investing. We can learn from each other!
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