Learn Investing by Doing

In a report this week on public school financial education, my home state of Utah was the only state to get an A+. We’ve come a long way since the 90’s when several states began to mandate financial education in their public school system. I applaud these efforts, having seen first-hand the ruin that can come to families and individuals who do not manage money well.
One of the most popular financial educational activities offered the youth are the investing contests where the students are given $100,000 on paper to invest, and have a month or two to see who can grow it the most. These contests get the kids excited about investing, teach how to value a stock and predict its growth rate, and generate a desire to keep learning. These events have value and I support their use, but with a word of caution. The ability to make the most money in the stock market over a few weeks of time will earn a student bragging rights, but it has little to do with being a successful investor.
These high school investing competitions leave out one of the most important factors in investing – emotions. When your own money is on the line, the ups and downs of the markets take on a whole new dimension, and the education becomes powerful and lasting. A great mentor of mine used to joke that the greatest investing lessons come when people lose their own money.
If you really want to expand your kids’ financial education, help them take the basics learned in school and in investing competitions, and apply them to a real life situation. I recommend parents and grandparents assist youth in setting up a real investment account. Encourage them to contribute to it regularly from their own funds. Use a financial advisor and bring the child with you each time you meet with them. Let them see first-hand how it all works. Most importantly, review their statements with them. Grandparents often open accounts for their posterity but fail to involve the kids in the process. I have found great value in showing my own kids how the account’s value goes up, and sometimes down, over time. They learn patience and discipline and to appreciate the long term nature of investing.
I love to point out to my kids how much their account has made during a period of time, or how many dividends they earned without any extra effort on their part. There is no replacement for watching the magic of compound interest as it works with your own money. The process of letting your money work for you can become addicting, in a good way.
Classes and contests are a great first step to learning about investing, but nothing beats the real thing with real money. Let your kids learn while they are young so they will carry those lessons forward to when it really matters.