Shares for kids: David Thornton

In leading by example, parents can pass on valuable, lifelong insights into the world of saving and investing

We live in a financial world where all choices come down to what we can afford, so it makes as much sense to instil in your children an understanding of finance and investing as it does maths and science. But when and how do you do it?

Probably the most important thing to do is involve them in financial conversations and lead by example. Actions have a greater impact than opinions and it’s no different when it comes to teaching your children valuable lessons.

“Your beliefs become theirs,” says Vanessa Stoykov, chief executive of Evolution Media.

“Whatever you learn from your parents is usually how you manage money, or you do the exact opposite because you hated how they managed money. If your children see you investing, they’ll be more inclined to replicate that; if they see you struggling, they’ll probably learn scarcity.”

Equally, pointing to other examples can add credibility to your own actions. “Access to seeing how other people live is important. If they see it and want it then they’ll emulate it,” says Stoykov.

The first step and one you can start as early as age three is teaching your kids how to save.

As they get older you can move on to teaching them how to invest. This way they learn that without the former (saving), they simply can’t do the latter and that you need to get capital from somewhere to make your first investment, says Stoykov.

Compare stocks to food

Leading by example through responsible saving habits is within the grasp of everyone because the same concept applies regardless of the scale. Saving cents to get the buying power of dollars is the same concept as saving hundreds to get the buying power of thousands.

It’s all about connecting present behaviour with future outcomes.

“Food is a very useful proxy to do this – the ability to delay gratification is huge,” says financial literacy campaigner Nicole Pedersen-McKinnon.

This becomes an easy way to connect saving with delayed gratification. You’re saving or investing because you want “X”.

“I use the term ‘future you’,” she says. “A mantra of saving, say, 10% for the future you is very important. It’s tangible, it’s something they want, but it’s in the future so it gets them projecting forward. Short termism is really the enemy of secure finances.

“Again to analogise with food, ‘Are you going to have two helpings now or do you want to keep some for future you?’ ”

From here you can introduce themes about investing. This can be done without even mentioning the word investment.

“All of us can see solid businesses from a customer service point of view,” says Pedersen-McKinnon.

“You can explain how JB Hi-Fi has done well during the pandemic because they sell products for the home. Convey to the kids what businesses work and don’t work, which have closed down and which have flourished and expanded.”

This makes it easier to explain the ebbs and flows of the stockmarket.

Make the connections

Connecting the real world to investing allows children to understand the main driving forces behind the stock price chart they’ll grapple with at some point.

Chris Brycki, chief executive of the investment platform Stockspot, says his dad opened the newspaper and pointed to all the different companies, all businesses you can interact with day to day, and explained that the sharemarket is a way you can buy a share of that business and share in the profits.

“When you own Woolworths shares, you essentially own a shelf at the supermarket

and receive a profit for those boxes of cereal they’re selling,” he says.

Stoykov says her son likes Tesla cars, so he invested in Tesla. “If they want it, there’s a good chance other people will too,” she says.

Once your children have a good idea about the companies behind stocks, you can move on to teaching them a few investing strategies.

Diversification is jargonistic but the logic is straightforward – don’t put all your eggs in one basket.

“There are different ways you can teach diversification, but show your kids what can happen if all your investment is in one company, because it can all go to zero,” says Brycki.

However, while it’s important to convey the importance of lowering risk, this shouldn’t translate into a phobia of taking any risk at all. Wrapping them in a zero-risk mindset will see them avoid investing altogether. There probably isn’t a successful investor alive who has made their fortune risk free.

The important lesson to pass on here is that “when you’re making investment decisions, it’s not about getting all of your investments right, but about making a higher probability of the right decisions than others,” says Brycki.

Money makes money

Compound growth is an equally important concept to stress early on – the understanding that making small investments today has an enormous impact in the future.

“The power of compound growth is an easy thing to teach. You can go even go onto ASIC’s website and use their compound calculator,” says Brycki. “By the same token, paying away small costs as soon as possible is also important because debt is an obligation that’s preventing investment.”

The central message here is about having productive rather than dormant wealth.

Stoykov underscores the importance of conveying the power of money to make money.

“Working smart is more important than working hard,” she says.

With a couple of these key investing concepts under their belt, your children may be ready to start learning how to invest in the stockmarket.

Investors, not gamblers

The ASX sharemarket game often promoted at schools may not be the best way to instil a responsible investing strategy. “It doesn’t teach kids responsible investing, it creates traders,” says Brycki, who won the ASX game as a kid multiple years.

He once won by investing only in gold companies after learning that the Central Bank of England would stop selling gold.

It paid off in the end, to be sure, but was the financial equivalent of putting everything on black. If it comes off, it’s a clean sweep but it’s a boom-or-bust proposition.

“I won the ASX sharemarket game by taking as much risk as possible, risk you shouldn’t be taking in real life. I thought I was investing, but what I was really doing was learning how to be a trader,” he says.

Brycki’s earlier success with this high-risk strategy could have been a poisoned chalice. He later learned the hard way how turbulent individual stock picking can be, having made a fortune in the 1990s tech boom before losing 80% of the money he’d made.

The money lesson here is a valuable one. “Losing money as a kid is very important because it makes you humble about your ability and more likely to pick a sensible strategy rather than a gambling strategy.”

“Losing money as a kid is very important because it makes you humble about your ability and more likely to pick a sensible strategy”