Buy a share of a favorite company’s stock for your child. That’s the time-honored technique for sparking an early interest in investing.
Why? It works. What kid wouldn’t want to own a piece of Disney? It’s the perfect way to turn the otherwise dry and abstract topic of investing into something personal and concrete.
There’s one big problem through. Betting on a single stock is a horrible investing strategy. It’s just gambling.
Case in point: my Chipotle chomping son was thrilled to receive a share of his burrito bingeing destination of choice last year for Christmas. This was shortly after the chain’s infamous E. coli debacle. We both knew the popular restaurant would rebound quickly as they tackled their problems. Furthermore, the wise counsel of Warren Buffett rang in our ears: “Be fearful when others are greedy and greedy when others are fearful.” Clearly a savvy investing maneuver on our part, right?
A year later, Chipotle is down over 27 percent. Doh!
The message for my son? The market is no place for his money. Way too risky. Way too hard to pick a winner.
Financial parenting fail. Right?
Not so fast.
We also bought him a piece of the overall stock market — a share of Vanguard’s VTI. As Jack Bogle says: “Don’t look for the needle in the haystack. Just buy the haystack!” In other words, there’s no need to struggle to pick individual winners. If you buy a piece of every stock in the market, you can’t help but scoop up all the winners too.
So how’d that work out?
VTI is up over 13 percent since then. Sweet.
Now, that isn’t to say your results will match. In fact, you might see the complete opposite.
Either way, setting up a little friendly competition between an exciting stock and a “boring” index will set the stage for ongoing concrete discussions with your youngster about critical investing principles like risk, volatility, and diversification.
The only sure bet? Your kid will wind up being a savvier investor as a result.
P.S. If you’d rather not hassle with setting up a custodial account for your youngster, consider a parent-paid investment account instead.
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