Investment account for an 8YO -- options, advice, warnings?

[lhamo]

Our 8YO DS has been showing a strong interest in personal finance -- started this summer when we started playing money-related games (Payday, Monopoly, Life) together, and now he watches Suze Orman with me (LOOOVES the "Can I Afford It" section, especially when people get denied!) and is asking all kinds of questions about how money works in our lives (how much our salaries are, how much our expenses are, how much we have in retirement, etc.). He has also expressed an interest in buying stocks. We save for the kids college funds already, but in a 529 that only has mutual-fund based options (thankfully with Vanguard, so low-fee). So I am thinking of setting up a small investment account for him so that he can learn how individual stocks and mutual funds work. I would probably do this through TD, where we have our own stock accounts, but am also open to other options.

My idea is to talk with him about the different investing philosophies we have found useful (dollar cost averaging, index funds, "buy what you know" approach to individual stocks, value stocks, etc.) and let him experiment with just a moderate amount of guidance from us. It would not be a huge amount of money -- maybe $50-100/month to start with. I figure if he loses it all it can go in the "educational expenses" column. But I don't think he will -- he catches on pretty quick and hates to lose/waste money.

Has anybody done this with their kids, and what have the results been? What things should I be aware of when setting up the account? I know I can probably use a UGMA approach -- taxes should not be a major issue as we live overseas and have limited US-derived income that is generally below taxable amounts.

Appreciate any feedback/insights people care to share.

lhamo

 

[sirion]

Well, my first reaction is that you should teach him about low-cost index options before you go all gung-ho into individual stocks. But then, investing in index funds isn't very exciting. One idea is to have him do the work to buy and sell fun stocks, but not by actually investing real money at first. Have him track the value via the newspaper and a spreadsheet or whatever and buy or sell as he chooses with whatever budget you guys want. Then, he gets all the "fun" but with none of the risk. After he's done that for a year or so, maybe you can throw some real cash in the game. Just a thought...

 

[clifp]

Lets see Buffett bought his first stock at age 11, so at 8 you maybe set for life...

I really like the idea of setting him up with a Play money account give him a year or so and see how he does Also investigate if there is a school investment contest, there is in Hawaii and start at the elementary school level..

I'd check out sharebuilder as an alternative to TD ameritrade.

I'd skip the index fund lesson, I find them boring as a 50 year old kid as an 8 year old...

 

[lhamo]

Lets see Buffett bought his first stock at age 11, so at 8 you maybe set for life...

Ha! I had the same thought

He watched the Buffett/Gates special that they had on CNBC with me a few weeks ago and was asking how they got so rich -- that's kind of where this interest in stocks came from. He wants to be a scientist/inventor, and he might potentially make a good entrepreneur one day. We have talked quite a bit about the benefits/risks of working for yourself versus working for someone else.

Point well taken about a "virtual account" approach -- that does make sense, though knowing his personality it would be more interesting/compelling for him if real money was involved.

The investment competition thing is an interesting possibility -- not sure if any of them are open to kids overseas. I could potentially propose starting something like that as an after-school activity if there are other budding investors at his school.

Junior Achievement is expanding in China, and that would be an interesting angle to pursue when he is a bit older, to develop business skills.

I'm actually kind of excited to have someone else in the family interested in financial issues -- DH is always happy when I report out net worth growth, but his eyes start to glaze over a bit when I get into more detail.

 

[HFWR]

I'd spend some time talking about what companies do, what their costs are, and what their profit margins are. When you buy stock, you are buying ownership in a company. I'd worry that treating stocks as a "black box" could convey the wrong message...

 

[lhamo]

I'd spend some time talking about what companies do, what their costs are, and what their profit margins are. When you buy stock, you are buying ownership in a company. I'd worry that treating stocks as a "black box" could convey the wrong message...

He knows quite a bit of this stuff, at an 8yo level. We have already had quite a few conversations about economics and finance, and he is really interested in learning more. He was thrilled when I told him that he might just be in a position to start investing at a younger age than Buffett! We went briefly through the Wikipedia entry on him because DS was interested in learning how he started his first business, etc. We also talked about what happened when his dad and I bought our first individual stocks in late 2000 (just pre-crash) and the fact that our portfolio included some choices that turned out to be good (Ebay, Microsoft), some that were only mediocre (Intel, Dell) and one that was crash and burn (Worldcom). He is really interested about how companies work, how stock works, and how you make money in the market. He has some funny ideas -- a few weeks ago he said he doesn't want to be the boss of a company because the boss has to pay everybody else out of their salary, so they earn less. I guess that isn't so far off, if you are talking about an ethical business that doesn't just skim all the cream off the top! But it opens the door for talking about other ways that business owners make money besides salary -- stock options, profit sharing, deferred compensation, etc.

Secondary question: are there any good books out there for kids that explain economics and finance? He is reading at a fairly high level for his age, but probably still needs something a bit stepped down.

BTW, thanks again for all the feedback -- helps to have someplace to bounce these ideas around!

lhamo