How to Teach Your Teen to Invest His Money

Before you teach your teen how to invest his money, he must have a good grasp on why it is important to save his money. He must know how to read a bank statement, how to balance a checkbook, how to pay bills on line or off line and how to save money for a particular purpose. He must also realize the importance of paying his bills on time and building a good credit rating.

Once your teenager agrees(at least in theory) that it is a good thing to pay his bills on time and not allow himself to go into debt, then it is time to teach him how to invest his extra money. Resist the temptation to tell him to keep all his money in a savings account. With money market interest rates at about 0.35%/month or perhaps 4% per year, you are doing him no favors by telling him to "rathole" all his money in a savings account.

What you do need to do is to teach him how to invest his money in the stock and/or bond markets. If you know nothing about investing money or you have someone else do it for you, it's time to learn how on your own. Buy books and go to on line investing websites until you find a method you agree with and are comfortable following with your own money. Only then can you tell your teen how to invest his money.

I have an advantage over most other parents in that I trade stocks and bonds for a living. I've done this full time for about two years now and have been fairly successful. It will take a few more years for me to make enough money consistently to support my family. Luckily, my wife also works, so we can afford to have me trade safely until I can make a consistent living.

All of this just to tell you that I already know a lot about investing and can easily teach my two children. If you don't have the experience, you need to get going and take control of your own financial life. A good gift to give to your children is the ability to invest their money on their own, and not to depend on anyone or any financial institution. Let them know that no outside agency cares nearly as much about their investments as they do. Encourage them to do everything themselves. They will get much more satisfaction and feel more in control of their lives.

Assuming you invest your own money and also that you have been at least fairly successful at it, here are some steps that you may consider to get your teenager interested in investing his own money:
*** Show your teenager your investment account. Tell him what stocks, bonds, exchange traded funds(ETF's), etc you are invested in and why.

*** Disclose to your teen what on line investing sites you use and what books you have read that you have found useful. Whichever on line investing site you use, go through the whole website with your teen, showing him all he can do to help him pick a new stock to buy. Also display your on line portfolio, which should show how many shares you have of each stock and how much money it has made for you so far.

*** Tell your teen all about how you invest money. Let him know the trading system you use and why you use it. Indicate why you like this particular system and how long you have used it. Make sure he knows how much money you have made using your trading system and how long it took to make that money.

*** Reveal to your teen that investing is not a "get rich quick" scheme. Tell him that the best traders and investors make money slowly but consistently over time. Help him understand the difference between investing and gambling.

*** Illustrate some hard facts of trading, such as this gem: The markets do not know you and don't care about you. The markets know nothing of your goals and how much money you hope to make. The markets are not for you or against you.

*** Make sure your teen knows that he cannot take losses personally, He may have done nothing wrong. Spell out the need for him to be patient and not really care what the market does on any particular day. Hopefully, you have taught him a trading system that takes money "off the table" when the market offers it to you and buys more shares when the stock moves a certain percentage lower.

*** Conversely, your teenager should not grow overconfident if he makes money. Assist him to understand that the markets are fickle at best and that he must maintain a calm attitude in the face of gains as well as losses.

*** When you get to the point of sitting down with your teen to try to hammer out a good portfolio, there are some things you need to keep in mind:

# Most trading accounts need at least $2000 to start with. Try to invest at least $3000 so your teen can have a diversified portfolio. So where does this money come from? Hopefully, your teen is at least 16 and demonstrates a maturity about saving money and paying his bills on time. If so, you might consider helping your teenager along and making a gift to him of the starting equity. If he wants to invest more later(hopefully once a month), be sure to match whatever he wants to put in. Do all you can to encourage your teen to invest his excess cash in this way.

# Use a trading house with rock bottom commissions. My trading company concentrates on stock options, so just buying/selling stocks and exchange traded funds(ETF's) costs just $2.95 per transaction. That's about as low as you can get.

# Encourage your teen to trade for the long term. Strongly discourage day trading of any kind. Also encourage him to stay away from high-risk options or currency trading. Make sure he stays far away from futures or futures options trading.

# If you have your own diversified portfolio, you can show your teen what you have and why. Encourage him to find his own stocks and come to you with his prospective portfolio. Go over with him why he chose them and what his long term goals are with each stock or ETF. If you have been successful trading, you may suggest that he adopts your own trading strategy, with changes that suit his trading personality.

# Assuming you start off with $3000, I strongly advise you to buy into three investment types: a bond fund, a stock/ETF, and a royalty trust fund. Royalty trust funds give good dividends and are very stable. They usually have something to do with natural gas or oil pipelines. Just type in "royalty trust funds" into your favorite search engine to learn more about them. Also, I would advise you to encourage your teen to invest in some type of gold fund(given our current economy). There are a few good gold ETF's out there. Lastly, a high yielding but stable bond fund would make for a diversified portfolio.

# Notice that with all the above investment types, I am advocating either high dividend rates or potential high appreciation rates. Your teen will realize stable dividend returns in royalty trust funds and bond funds. He will also appreciate the potential high returns from a gold fund, given our current economy. You should be able to help him fund a royalty trust fund and a bond fund that both yield about six to eight percent annually just in dividend payouts. And with all the predictions about gold doubling in price(it's about $1000/ounce now), your teen should see a significant appreciation in his gold fund.

# Nothing will discourage your teen faster than to see his investments go downhill. Do all you can to encourage him to buy stable, high return equities. Help him to see that he can earn roughly seven percent just with dividends payments and another seven percent or so if his stocks appreciate in value.

# With $3000 safely invested in the equity markets, your teen should make about $400 profit per year. Have him compare that with putting his money into a savings account and letting it sit for a year. Assuming he makes the current money market rate(about 0.35% per month), he would realize about about $125 per year. Let him do the math so he can hopefully tell you that by investing safely in stocks/bonds as outlined above, he should realize about 13.33% annually. He can then compare that to what he would receive if he put all his money in a money market account, which turns out to be about a 4.17% return annually. Which one would YOU choose for yourself?

Conclusions:

There is no greater gift you can give your children than the tools they need to succeed in life. No matter what anyone says, everyone has to make their own living and be able to support themselves. Investing safely is something your teen can do for the rest of his life to either supplement his income or to trade for a living if he is interested in that path.

There are two things your teenager must know to succeed financially in life:
# How to save his money and how to pay his bills on time
# How to invest his money to become financially independent over his lifetime
It is amazing how other things in your life fall into place when you are financially independent. Without money worries, you can concentrate on the good things in life and have more fun. I know this to be true in my own life. Let your teen know how much brighter life will be if he doesn't have to worry about money or how he is going to support or at least contribute to the support of his family. Help him to understand how good it feels to be debt-free and financially independent. It is something he can pass on to his own children and you made it happen!