Blogs & Comment

Children and investing

How should children be taught the virtues of saving and investing? What I often see is parents purchasing shares in one or two companies making things children know and enjoy- such as Disney or Nike. That will supposedly capture their interest and generate discussions around the dinner table. I also have seen purchase of shares in blue chips via dividend reinvestment plans because the required amounts are small, which fits in well with purely educational investing and deductions from allowances. There are also stock-picking contests in schools.
Notice how all of the above approaches put the emphasis on picking stocks? Yet, academics and a growing number of investors say stock picking plays a minor role in the variability of investment returns. More important factors are asset allocation, diversification, and cost minimization.
A better way to teach children investing, then, may be to set up a portfolio of index funds (say along the lines of the Couch Potato Portfolio). They can be purchased in small amounts at low cost. Dividends can be automatically reinvested, commission-free.
In Canada, they can also be held inside an RESP to collect government education grants and compound tax-free. The account will not only teach the value of saving, diversification, and asset allocation but also provide funds for university courses. A couple of stocks picked without regard for diversification, asset allocation, etc. has a greater risk of not compounding as well, and could end up discouraging saving and investing.