As an added bonus, these tips can also be applied to new investors at any stage of their life. So, without further ado, let’s get started!
1. Embrace the value of time
Kids have what adults crave – more time. From an investing perspective, this has major significance. You see, the more time you have, the more you can take advantage of compounding.
Compounding is the exponential effect of earning interest or dividends on your capital. You achieve this by ensuring your investment firstly earns interest or dividends, secondly, by reinvesting these earnings and finally, waiting and letting compounding take effect.
For example, if you start with $1,000 and earn 6% interest every year, after the first year you will have earned $60. If you keep that $60 in the account, your invested capital becomes $1,060, up from $1,000. After the second year, you will have earned $64 on that $1,060, rather than $60 on $1,000. As you can see through reinvesting your earnings, the interest grows exponentially each year, so much so that after 20 years invested your initial $1000 will have grown to $3207!
This simple example illustrates the power of compounding and embracing this phenomenon is a top investing tip for kids just starting out.
2. Start small if you like, but make sure you start!
A lot of trading platforms require minimum initial investments of around $500-$1000. This might be either out of reach for young kids, or too much exposure at a time.
That doesn’t mean that kids can’t, with their parents’ help, start investing and become sound investors over time. There are a range of platforms, like Itrust Invest, that have made it easier for new investors to gain exposure to financial markets with much lower capital amounts. These simple, online, platforms allow parents and relatives to invest on behalf of their kids from as little as $10 and celebrate with them as they learn the ropes of investing and reach milestones towards their goals.
By dipping their toes in with small amounts, this limits their exposure as they experience and learn about investing. Once they become more comfortable and gain confidence, the capital they invest can be increased.
Looping back to the first tip, a key point is that, even though you may only have $10 to invest on a regular basis, it is important to start. Like smart people say, any journey starts with a single step. The sooner you start investing for your children, the better!
3. Keep it simple
Our third investing tip for kids is to keep it simple – investing doesn’t need to be complicated!
Across Australia and the world, there are a lot of large, well-known companies with simple business models. A lot of people have done extremely well by investing in these companies over a long period of time.
Although it may be difficult to choose which company to invest in, there are a few simple ways you can spread your investment across several companies from one trade. These include investing in managed funds or exchange-traded funds (ETFs).
By investing in several companies at once, these types of funds offer low fees and diversification – helping to reduce the risk of your capital losing significant value if one individual stock goes down.
There are professionally managed funds such as the Magellan Global Fund which expose investors to returns from some of the world’s largest companies. These include household names such as Visa, Facebook, and Google. Since first created in July 2007, a $10,000 initial investment in the Magellan Global Fund would today be worth approximately $45,000*, a testament to the phrase ‘time in the market beats timing the market’!
However, for as little as $10 investors can participate in this fund via the Itrust Global Equities investment option.
*Calculations are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable). Fund Inception 1 July 2007.
4. Set and stick to a budget, and remain disciplined with goals
Setting a budget means having a plan and knowing how much money is coming in and going out. For a child this might mean receiving $20 per week in pocket money and deciding to allocate a quarter of this to save for investments.
Doing this however is not easy and requires discipline. Money given at birthdays, Christmas and other special occasions should form part of this budget, and as children become engaged with growing their investment portfolio, they may be inclined to invest spare funds when they have them.
Another advantage of investing their pocket money is that they might catch on how the more pocket money they earn, the more their investments can grow – i.e., hard work means more money.
Finally, having clear and realistic goals is another great way to stay motivated throughout your investing journey. These goals could range from saving for a child’s first mountain bike to paying for their future house deposit.
5. Talk to kids about investing and keep them informed and engaged
Staying engaged and informed rounds out our final investing tip for kids.
Although investing may seem mostly about wealth creation, a good long-term investor will necessarily learn about broader subjects and disciplines.
Many factors influence a company’s profitability. These include the domestic and international economy, domestic and international politics, the price of commodities, inflation, population growth, specific market factors, governance issues and the weather.
By talking to the kids in your life about the companies they are invested in, and why some are doing better than others, you may engage them to think about these issues. Particularly, you may find them start to think creatively about why or how a particular company may perform given a set of circumstances.
This engagement with the broader economy and the world may lead them to pursue education and work opportunities they may otherwise would not have done but for starting their investing journey early.
It’s not just about making money
Children stand to benefit most from the activity of investing, as the lessons learnt here will help them develop patience, discipline, and responsibility as they become adults.
Through following these investing tips, kids will not only get a jump start on their future financial success, but also learn a few key life lessons.
Parents, carers and guardians should consider opening an investment account in order to take advantage of the time children have ahead of them.
Speak to one of our friendly experts using the live chat function, or call us on 1300 811 119.
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Disclaimer: in preparing this blog we have not considered your personal investment objectives, financial situation or needs. Instead, this blog contains general advice and has been prepared for informational purposes only. It is not intended as financial product advice or a recommendation in relation to any investments or securities. Terms apply when using the platform provided by Itrust Investment Fund, and it is important you read the PDS and key documents before deciding if any of our offerings are right for you.