28 Mar Teaching kids about investing

Q. I want to teach my kids about investing. What’s the best way to start?
— Dad

A. We love questions like this.

Before you get to the specifics of how to invest, start a conversation about why saving is important.

Personal finance can be a discussion for the entire family, as having this knowledge is empowering and can help your children make proper financial decisions, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

First begin with teaching children about deciding on their financial goals.

“Share with them some of your own, such as educating your children, purchasing a home or vacation home, and retirement,” she said. “Let them know that there are short-term goals for more immediate needs where saving makes sense, and longer-term goals that you should invest for.”

Children may want to buy a video game, for example. D’Agostini said if they get an allowance or have a job, they can save a portion of what they make towards that goal. You can show them how saving a set amount will achieve that goal in a certain amount of time.

For longer-term goals, you can start the conversation about investments.

It used to be that you could purchase a stock and have a paper stock certificate issued, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

“With a paper certificate of Disney or McDonald’s stock hanging on the wall, it was a constant reminder that the child was actually an owner of the organization and its products that they knew something about,” he said. “Unfortunately, stock certificates are out of favor now, so you’ll need to look at your stock holdings online or via your statements.”

Rossi said that’s not a bad thing, and you can still have teachable moments with your kids.

He recommends you consider opening a custodial account at a brokerage firm. These are also called UTMA accounts for Uniform Transfer to Minors Act accounts.

You would be the custodian for your child’s assets, and they would legally take ownership of the assets at the age of 21 in New Jersey. Note the age of majority varies by state.

Rossi said with an UTMA account, you can add the child’s money as they receive it for special occasions such as for birthdays or holidays.

“When they get to an age where they can comprehend investing concepts, you give them the opportunity to become an owner of their favorite companies,” Rossi said. “Even if you buy only a few shares, over the years those shares give you the opportunity to have conversations about stock prices, profits, company fundamentals, risk versus reward, diversification and most importantly, showing the child how his or her money can grow through ownership in a company.”

D’Agostini said your children will be more interested if they select companies that they’re familiar with, such as Apple or McDonalds.

“Show them where they can locate the price either online or in the paper, and track the price of that stock on a sheet going forward,” D’Agostini said. “They now can visualize the ups and downs of the market. Look for articles on that stock and show them how favorable news or not so favorable news can impact the stock price over time.”

Once they understand the fundamentals of stocks, it’s a lot easier to explain mutual funds, exchange-traded funds and other investing concepts.

Rossi said this is also an opportunity to discuss how much of their money should be spent or saved.

“If they get an allowance, allocate a certain amount every time they get paid to savings so they understand concepts such as `pay yourself first’ and `dollar cost averaging,'” Rossi said. “If it’s a small amount, deposit it into their bank savings account and transfer money from the savings to their UTMA once they reach a certain threshold.”

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This story was first posted in March 2016.