How To Talk to Your Teens About Investing

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Gen Z are demanding action on climate change, deconstructing gender stereotypes, and two-thirds of them plan to start investing before graduating college or earlier.

They really are going to save us all.

But at the same time, more than half of today’s teens find investing to be “too confusing,” according to Fidelity’s 2022 Teens and Money Study. 72% say they have zero knowledge of stocks and ETFs, and nearly half say investing feels “out of reach.”

Luckily, 7 in 10 say they’ll turn to family for guidance and advice – but just 34% say their family regularly talks about investing. So instead, they go online, mostly to social media — where the advice can range from good to bad to downright dangerous.

So how do you talk to your teen about investing? How do you help them sift the good advice from the bad on social media? How do you make the “slow and steady” approach to investing look appealing when so many of their peers are getting rich from cryptocurrency?

The Short Version:

  • Teens are investing earlier than ever – but more than half admit that they’re missing essential knowledge to invest safely and effectively.
  • Powerful forces like FOMO, social media, and the false allure of cryptocurrency could be pulling them in the wrong direction.
  • A 30-minute crash course on the essentials — how to distinguish good from bad advice online, how to paper trade, the power of compound interest, the risks of crypto and how to set up an investing plan – will set them on a course for prosperity.

1. Teach Them How To Filter Between Good and Bad Financial Advice Online.

According to a CNBC|Momentive poll, social media is “by far” the most popular way that young investors research investment ideas. And while there’s plenty of nutritious advice out there for them to consume, there’s also no shortage of junk food.

I’ve seen popular “Finfluencers” with hundreds of thousands of followers tell young investors things like:

(a) Crypto investors always win in the long term.

(b) The Google stock split will double your investment value.

(c) You can save on a down payment by listing a rental property as a vacation home instead of a rental on your mortgage application.

All three are false, and (c) is illegal.

And yet, these “Finfluencers” continue to propagate dangerous money advice with impunity simply because they boast enough followers and false confidence.

So how do you help your teen distinguish between the broccoli and french fries of investing advice?

When your teen thinks they’ve stumbled upon a great tip or influencer, tell them to ask themselves the following three questions:

  1. What qualifies this person to give financial advice? Are they a Certified Financial Planner? An experienced lender or REALTOR? Remember; popularity is not a credential.
  2. Is their advice general or specific? Are they teaching you about stocks, real estate, or cryptocurrency in general? Or are they telling you which specific assets to invest in to “get rich quick”? The latter case is a scam or simply bad advice 100% of the time, especially within the realm of crypto.
    Read more>> How to Spot a Crypto Scam
  3. Can you verify their advice with additional outside sources? What does your family’s financial planner think? If you don’t have access to a financial planner, what does a quick Google and Reddit search tell them?

For more on helping your teen filter between good and bad investing advice on social media, check out these guides:

2. Give Them a Two-Minute Lesson on Compound Interest.

When it comes to investing, the best approach is the slow and steady one. Time and compound interest are your friends. All things considered, getting rich slowly is just way easier and magnitudes less risky than any get-rich-quick scheme.

But, unfortunately, the slow approach can sometimes be a hard sell — especially to a teen. There are just too many Finfluencers and fraudsters out there selling them on the fantasy of instant wealth, either through scams or mega-risky investments like crypto.

So how do you help your teen adopt a low-risk, long-term mindset?

In my experience, a two-minute lesson on the power of compound interest can work wonders — and lead right to that life-changing “aha” moment.

The Two Minute Compound Interest Lesson

Since the 1920s, the average annualized returns of the S&P 500 are 10.5%. That means if you invest $1,000 today, you’ll have $1,105 next year.

I know; $105 isn’t much to earn in a year.

But what happens next year?

You’ll earn 10.5% more, so you’ll have $1,221.

The year after that? $1,350.

So, if you can invest $1,000 in the S&P 500 by the time you graduate high school, guess how much you’ll have by the time you retire at 65?

The answer is $109,150.84.

Investor.gov compound interest calculator

Plus, if you can contribute an extra $100 each month, you’ll be a millionaire and then some:

Investor.gov compound interest calculator

Overall, I’ve found that a short session tinkering with a compound interest calculator can really change some teens’ mindset on long-term investing. The key takeaway is that they don’t need to gamble their money on crypto to become wealthy — all they need is patience.

Related>> What Is Compound Interest and How Does It Work?

3. Set Them Up With a Risk-Free Paper Trading Account.

Like many things, teens often develop an interest in investing because their friends are doing it. Heck, “investing clubs” weren’t even a thing when I was in school — but they definitely are now.

While hobbies and social connectivity are great, as a parent you might be worried about how their peers might influence your teen’s investing behavior. A group mentality combined with FOMO can be powerful motivators, after all, and potentially lead your teen to expensive investing mistakes.

That’s why paper trading is so perfect for teens. Also known as “virtual trading” or a “stock market simulator,” paper trading enables teens to trade $100,000 or more of totally fake money. They can double it — or completely torpedo it — without risking a single penny of their savings, all the while staying engaged with their peer group.

Paper trading is also a brilliant learning tool. Drawing from my own experiences as a young paper trader, the experience feels 100% real. The wins feel great and the losses send you back to the drawing board.

And since the paper trading account is a carbon copy of the real thing, your teen will become fluent in their chosen trading platform well before they switch to real money.

TD Ameritrade’s Thinkorswim virtual trading account

Learn more>>Paper Trading: Experience Investing Without an Actual Risk.

4. Don’t Say “No” to Crypto: Use It as a Chance To Talk Risk and Asset Allocation Instead.

According to a report by Morning Consult, 13% of Gen Z is willing to take “substantial financial risks expecting to earn substantial returns” compared to just 3% of Baby Boomers. That’s pretty worrying.

It would also explain why on average, Gen Z ends up investing $6,120 on cryptocurrency every 12 months.

In addition to the allure of instant riches, cryptocurrency has an especially unique appeal to the younger generations. It’s cool. It’s counter-cultural. It allows you to feel like part of an “in” crowd.

Plus, it’s hard to ignore. Everyone's heard of someone who got senselessly rich off crypto. And when you happen to know a lottery winner personally (and they’re constantly posting photos of their Ferrari on Instagram), it can make it harder to resist buying at least one ticket.

But at the same time, crypto is still an off-the-charts risky investment. Unlike bonds or index funds, cryptocurrencies like Terra LUNA can lose 99.9% of their value overnight.

So how do you convince your teen that crypto isn’t the right place to stash all of their graduation money?

Well, the recent glut of scams, fraud, and the ongoing crypto winter may do most of the convincing for you.

But if your teen is considering “buying the dip,” rather than say “no,” use the opportunity to teach them about risk tolerance and asset allocation.

  • First, tell them it’s great that they’re learning about alternative, speculative assets. The next step is for them to assess their risk tolerance so they know how much to invest in such a high-risk asset class.
  • Then, a low, medium, and high risk tolerance investor should only invest 0%, 5%, and 10% respectively in crypto and other speculative assets. And hey, that’s not you or me talking, but multiple Certified Financial Planners.

In short, the best answer to a young investor looking to buy crypto isn’t “no,” but rather, “let’s find out how much makes sense for you.”

5. Set Up a Simple Investing Plan for Summer/Graduation Money.

Depending on your teen’s comfort level with money and technology, you may want to open a brokerage account for them — and handle their investments until graduation — while they tinker on the side with a paper trading account. But if they want the reins right away, we recommend SoFi for beginners.

Note: If your teen is under 18, you have to open a custodial account for them — even if it’s just a paper trading account.

The key to establishing a good, first investing plan for your teen is simplicity. Start with a single index fund and challenge them to save a certain amount by graduation to invest – maybe $1,000. You can further incentivize them by offering to match their contributions.

And if they begin to lose focus or motivation, gently remind them that every $10 they can invest in high school becomes nearly $1,500 by retirement.

Get started >> The Best Custodial Accounts for 2022

The Bottom Line

Today’s teens are hungry for investing knowledge — they just need a little guidance.

And luckily, a crash course in safe and effective investing doesn’t have to take longer than 30 minutes. As a parent, once you cover:

  • How to spot good and bad advice online
  • Compound interest
  • Paper trading
  • Crypto risks, and
  • Setting up an investing plan

You’ve given your teen all of the essentials to build a stable, prosperous future.

More simple investing wisdom>>

Chris Butsch

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

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