How Can a Teenager Begin to Invest?
How Can a Teenager Begin to Invest?
November 18, 2015
My 15-year-old grandson called me the other night and asked if he should open a brokerage account. He has $500 to invest. What should I tell him? Thanks!
I must say I'm impressed! For a teen to want to invest his savings rather than buy the latest tech toy is quite a positive statement. Someone must be doing something right! I'm all for young people starting to invest early for several reasons. First, it's a great way for them to learn about the mechanics of investing. Second, they can learn about the markets—during both good times and bad—without too much at stake. And finally (and perhaps most importantly), it gives an adult an excellent opportunity to connect to a teen in a substantive way, sharing thoughts about current events as well as the future.
But before you get started, it's important to set the stage. Your grandson obviously has experience saving his money. Now you can talk about how investing is different. Explain that while saving is safe, it doesn't allow for much growth. Investing, on the other hand, involves risk and requires careful management, but is a better way to build long-term wealth.
If your grandson understands this difference and still wants to invest, I'd say go for it.
Open a custodial account
Because your grandson is a minor, he'll need an adult (most likely either you or a parent) to open the account and act as its custodian until he reaches the age of majority (typically 18 or 21—or up to 25, depending on his state). There are two options: a custodial brokerage account or, if your grandson has earned income, a custodial Roth IRA. At his age, a brokerage account is the most likely choice.
One caveat with a custodial brokerage account, though: if large amounts of money are involved, there can be tax issues as well as a possible impact on college financial aid. But for small amounts, it provides a fantastic way for young people to get their first exposure to investing. And you can open a custodial account for as little as $100.
Introduce the basics of investing
Once the money is in the account, it's time to invest. Your first step should be to explain some fundamentals:
- Goal setting—Explain the importance of establishing goals, both short- and long-term. Money for a short-term goal, like a car or a trip—or any money he'll need in three to five years—shouldn't be invested in the stock market. He can take on more risk for longer-term goals because he'll have more time to ride out market declines. Kids often aren't programmed to think this way, so it could lead to some interesting discussions!
- Diversification—Discuss the critical need to diversify by holding different types of investments—the "don't put all your eggs in one basket" concept. This will become more important as his assets grow.
- Asset allocation—Talk to him about dividing his money among stocks, bonds, and cash in a way that is appropriate for him now—and how that might change in the future.
- Risk/reward—Be sure he understands that the highest potential for gain usually involves a higher level of risk. Have him think about how much risk he's comfortable with.
When your grandson is ready to make his first investment, there are a couple of ways to go. One approach would be to buy a mutual fund or ETF so he'd get instant diversification in a single investment.
However, he might find it more engaging to buy a few shares of companies that he's familiar with or has an interest in—for example, a technology, entertainment or sports company. Even though $500 isn't enough to build a truly diversified portfolio, and transaction costs may eat into his capital, owning stocks he can identify with could make investing more interesting.
Encourage ongoing involvement
Once you get your grandson going, help him follow his investments and the markets. Show him how easy it is to check his portfolio online. As you know, there's an entire universe of information online about investing and managing money. Offer to be a resource if he has specific questions.
Hopefully, the more he learns, the more your grandson will be inspired to save and invest. And as we approach Thanksgiving and the start of the holiday season, you might give him an extra motivation by offering to match a percentage of any new contributions to his account as a gift. It would be an added bond between you—and something you could each be truly thankful for this year and for many years to come.
One final word: studies have shown that many parents are more likely to discuss investing with their sons than daughters. So to you parents and grandparents of girls, include them in the lessons as well!
Investing involves risk, including possible loss of principal. Diversification and asset allocation cannot ensure a profit or that an investor’s goals will be met and cannot eliminate the risk of investment losses.