Investing is an important life skill that can benefit individuals of all ages. However, teaching young children how to invest may seem like a daunting task. In this blog, we will discuss some fundamental concepts that your children can learn about investing, including index funds, dollar cost averaging, balanced asset mix, and diversification.

Index Funds

An index fund is a type of mutual fund or exchange-traded fund (ETF) that tracks a specific stock market index, such as the S&P 500 or the Nasdaq Composite. Index funds provide a simple way for young children to get broad market exposure and diversify across different companies.  Beyond market indexes, there are also sector-specific indexes to assist investors in narrowing in a particular part of the market. Indexes can also focus on different styles and themes like value, growth, and dividend investing. Overall, diversification is important because it helps reduce risk by spreading investments across different asset classes, industries, and geographies.

Dollar Cost Averaging

Dollar cost averaging is a strategy that involves investing a fixed amount of money at regular intervals, regardless of the current price of the investment. This strategy helps to reduce the risk of investing all of your money at once when the market may be at a peak. Children can learn about dollar cost averaging by setting up a regular investment plan, such as investing a set amount each month into an index fund.

Balanced Asset Mix

A ‘balanced asset mix’ is an investment strategy that involves investing in a mix of different asset classes, such as stocks, bonds, and cash. This strategy helps to balance the risk and return of an investment portfolio. Young children can learn about the importance of a balanced asset mix by understanding the different levels of risk and return for each asset class. For example, stocks generally have higher potential returns but also come with higher risk, while bonds may have lower potential returns but also lower risk.

Diversification

Diversification is the practice of spreading investments across different asset classes, industries, and geographies to reduce risk. Young children can learn about diversification by understanding that investing in a single company or industry will increase risk relative to investing in a broad-based index fund that includes many different companies and industries.

Putting these concepts into practice is easier than one may think. Although minors are unable to open their own investment accounts, parents can open a new investment account and use it as a way to engage with their young children. Alternatively, you could even create an online practice account. Once an account is opened, you can start investing in a balanced mix of index and bond funds that align with their investment goals and risk tolerance. You may consider allocating a fixed amount to each asset type, such as 60% into a stock fund and 40% into a bond fund. By doing this on a fixed monthly basis, you will also be implementing the concept of dollar cost averaging, which helps to reduce the risk of investing all the money at once. As you continue to invest regularly and monitor your portfolio, you can also adjust your asset allocation to maintain a balanced mix of investments to fit your potentially changing goals.

In addition to putting these concepts into practice, you can also involve your young children by talking about their investment performance on a quarterly basis. This will help them acknowledge the ‘ups and downs’ of the stock market and the importance of patience, discipline, and keeping a long-term perspective when it comes to investing. Encourage your children to ask questions and express their thoughts and feelings about their investments. You can also use this opportunity to reinforce the importance of sticking to a well-planned investment strategy and avoiding emotional decision-making. By involving your children in the investment process while teaching them fundamental investing concepts, you can set them on the path to building a strong financial future. Remember to make learning about investing fun and engaging, and don't be afraid to seek out professional guidance if needed. Happy investing!