Each quarter, our firm holds a Market Review Conference Call wherein we invite clients and listeners to ask our Chief Financial Officer, Mitch Tuchman, their pressing investment questions.
Recently, we received an interesting query from Dana, a client based in San Jose, CA. Dana’s main concern is that her high school age daughter is learning about stock picking in class – and while it may be an interesting economics exercise, Dana does not want her daughter to get the wrong idea about investing.
Find out what solution Mitch offers Dana, and how you too can broach the subject of best investment practices with the young adult in your life, in the Q & A below.
My teenage daughter is in a stock picking contest in her high school economics class. All of the kids are running around recommending companies like Netflix, Nike, Apple. I don’t want her to get the idea that this is really investing, so wanted to know how you recommend I explain this to her – in simple, easy to understand terms.
It’s a little frustrating to know that picking stocks is a very hard game to play. Professionally, most people don’t win at it. Teaching it in school, while it’s fun, sends the wrong message because stock picking is effectively gambling. You might as well set up a bunch of roulette tables in the school for the kids.
What I would recommend is teaching your daughter about index investing, which has been proven to beat stock picking 90 percent of the time.
What I’ve done for kids, my nephew, and my nieces, is set up portfolios, including three or four index funds, like VTI, which is all U.S. Or VEU, which is Europe, Japan, Australia, and the developed countries, and VWO, which is the emerging markets. If they buy, say 50% in the U.S., and then 25% in the other two forums, they get to watch the differences in how the markets are moving. I found that to be a very instructive way to show them how the stock markets work behave.
You can also demonstrate how investing works to your daughter by setting her up with a Roth IRA, which is great because that money can grow tax-deferred forever. If she contributes a few bucks to it every year, she will find out that when she gets to be my age, she’ll be in very good shape (financially).
I would do that instead of wrongly trying to convince your daughter that if she picks a good stock, and it’s successful, that that’s what makes her a good investor. Good investing comes from smart saving, regular contributions, low-cost index funds, and patiently staying the course no matter what the market does.