The Common Sense Investor

How to teach your kids when and when not to be patient about investing

Short-term investments, long-term investments, when to pull out, when to wait out the crises because you know you’ll recoup whatever losses you incurred. These questions often confuse an adult; how then can you teach it to a child?

The first thing to remember is that you are not putting your child through a crash course in portfolio management. You are not giving him a list of do’s and don’ts. You are not even setting out to teach him to be a Wall Street whiz.

What you are doing, as a parent, is giving him a life skill: to be analytical, decisive, and base decisions according to goals and not impulses. Because really, whenever there’s a crossroads and he doesn’t know what to do with his investment, you’ll be on hand to give advice and weigh the pros and cons. But that’s all assuming that he sees investment as something strategic and long term. If he didn’t—and his impulsiveness and impatience are what prompt all his money decisions—then you’ve got a much bigger problem on your hands. He’s not investing, then: he’s gambling. Might as well give him coins and point him to an online casino.

To give him a sense of strategy, and to help his thinking process as he weighs whether or not to pull out or wait it out, give him guide questions, things he can mull over to clarify what his next move should be.

The first set of questions is evaluating the investment itself. If it’s stocks for example, what would help him assess the long-term direction of the company? What are the danger signs that the company’s performance is not going to improve?

The next set of questions is evaluating the investment alternatives. Let’s say he does pull out. Where will he put his money? How do those instruments compare to where it is now? How do you weigh the new risks attached to that instrument against sticking it out with the current situation? Remind him that if he feels that his money isn’t safe, that implies it’s safer somewhere else. How true is that assumption? And what’s the next step?

Finally, help him evaluate his reasons for changing investments. What exactly is he trying to achieve? If his money’s not growing fast enough, then that means he’s set a particular target. How realistic is that target? Maybe he needs to adjust the goals, rather than change investment options. Children are naturally impatient; they want instant results, and will often try to rush the process. Help him distinguish whether or not his current investments are actually doing well based on trends (as opposed to doing well based on his expectations).