Investing in the Stock Market with Your Child
Bethany Murphy, an 11-year-old in Mt. Laurel, N.J., is as comfortable around the stock market as most kids her age are around video games. She got her interest in the market from a fourth-grade school project two years ago when she entered the local newspaper's stock contest.
"We chose five stocks, and the newspaper tracked them for us," says Bethany. Even after the contest was over, Bethany kept an eye on "her stocks" and eventually bought shares in one of the companies.
For Bethany's parents, their daughter's investment venture is about more than just making money, it's about teaching her the value of money. Tom and Marie Murphy opened an account for her with Stein Roe Young Investor Fund, a custodial account geared toward teaching kids about investing.
"I set out with the investment with the objective of her learning," says Tom Murphy. "Every quarter Stein Roe sends out a newsletter written where children can understand it."
The newsletter includes investing terms, games and company profiles. It's information that has piqued Bethany's interest. Since her initial investment, Bethany has won an essay contest with the company, which added another $5,000 into her portfolio. Her dad says the money in Stein Roe will stay there for the next eight years and will help with his daughter's college costs.
"I think it's pretty smart to do it at this age," admits Bethany. "You'll be able to understand the stock market before you get older. You can also have money invested so that you'll have money for college."
Robert Grace of McLean, Va., is another Stein Roe Young Investor with aspirations of using some of his investments for college. He's 12 now, but when he was 8, his grandparents opened an account for him. He also owns individual stocks. It's not uncommon in his house for dinner conversations to turn to bears and bulls. Robert's dad, David Grace, says they try to talk about the stock market along with other news events.
"We do look over his stocks with him and the stocks that we own," David Grace says. "It's important to talk about these things. It's a part of life. Kids need to understand, and it effects them now."
Robert says with the economy like it is, owning stocks is a good investment, as long as stocks are chosen wisely. "The big drops on Wall Street don't really concern me if it's one day," says Robert. "But if there's a pattern, then it will. Usually when our stock market goes down, it likely comes back and at a higher amount than it dropped."
In addition to Stein Roe, there are other investment companies offering kid-friendly stocks. USAA, in San Antonio, Texas, offers the First Start Growth Fund. Spokesman Tom Honeycutt says young shareholders will be at the forefront 20 to 30 years from now. "The mutual fund is a growth fund, and it's a good first investment for kids who have longer-term plans," he says.
However, not all parents can afford to purchase mutual funds or start a stock portfolio for their children. Neale S. Godfrey, a leading authority on children and money, says the instruction can take place in the home. Godfrey has published 13 books on the subject, including the Ultimate Kids' Money Book and A Penny Saved: Teaching Your Children the Values and Life Skills They Will Need to Live in the Real World. She also founded the Children's Financial Network to educate parents and kids about money. Godfrey says the earlier you start teaching your child, the easier it's going to be. Her suggestion is to start with savings and four jars.
"The way it works is pay them their age per week and divide it," explains Godfrey. "The first jar is for charity. Ten percent of the allowance goes into the jar right away. The remaining money is then divided into thirds: one-third for quick cash or instant gratification; one-third for medium-term savings; and one-third for long-term savings."
Bethany Murphy uses a similar approach to savings. However, her system involves three envelopes: savings, spending and charity. For Robert Grace, his savings are in black and white. "We have an allowance book that we keep for the kids," says Robert's dad. "Instead of giving them the money, they keep track of their money and what they plan to do with it."
Robert has been using the allowance book since he was old enough to write, about the age of 4. His parents believe the system is teaching him practical skills he's not learning in school. For Robert, his savings plan also offers him some stability in the up and down world of the stock market. "I have a savings just in case the stocks were to crash," admits Robert. "They probably won't, but I have it as a backup."
When to Start
Godfrey says parents should start the educational process when their children are 3 – that's when they can be given an allowance. At 5, she advises opening a bank account and by 10, involving children in stocks. Once children turn 12, they should start earning money outside the home and get involved in defined portfolios. And, Godfrey says, by the age of 16, children should be off the allowance system and earning all their extra spending money.
As for investments, Godfrey says parents need to stay up on the market and make the discussions a regular part of the day. She says the stocks don't necessarily have to be kid-friendly. Children will understand any stock described to them in their language. "We want the kids to really be part of what's going on and understand the market," she says. "Kids today are very savvy and will understand what you tell them."
Tom Murphy says what helped Bethany understand the market was the newspaper's stock market game. It's an activity he says parents can guide their children through at home by choosing stocks and tracking them over a period of several months.
"It's never too late," Godfrey says. "Just start with the basics and keep repeating them. It's a forever system."