I’ve always heard it’s not easy to teach your own child to play the piano, but I was curious to find out if the same applied to teaching my children about financial instruments. A recent article by USA Today explained how focusing on not failing often helps people succeed at investing. In other words, my job as a parent is to teach my children what not to do if I want them to be financially stable as older adults. My Millennial sons are just now entering their early 20s when financial experts say it’s the ideal time to start saving for retirement and other financial goals. I explained to my sons the biggest mistakes I made as a novice investors that were outlined by USA Today.
Forgetting to save
I made the mistake of saving sporadically when I was in my 20s. I made the excuse that I couldn’t have money automatically deducted from my paycheck because I was an independent contractor. However, I could have had my bank automatically move money from checking to savings each month. I also could have managed to have $50 each month automatically moved from checking into my discount brokerage account set up as a Roth IRA. Once I accumulated about $500, I started buying into exchange-traded funds.
It’s extremely common for young people to be afraid of the stock market. My sons know I was devastated by a 401(k) wipeout during the recession. According to USA Today, 24 percent of people think stocks are the best long-term investment, but others favor real estate and gold. While there is no guarantee the stock market will continue to go up, my 20-year-old son has a distinct advantage by investing in stocks compared to older people.
Compromising returns with fees
I taught my sons how to open Roth IRA accounts through a discount brokerage firm so they could save money on the fees associated with trading stocks and investing in various bonds or other funds. Investment advisors may charge 1 percent or more to manage an account. If the advisor invests in an exchange-traded fund or mutual fund, there are additional fees charged by the fund managers. My sons know it’s easy to manage their own investments. Also, the discount brokerage firm provides an online trading account as well as customer service to answer their questions if I’m not around.
Trading too often
I showed my sons how they can get better returns by holding for the long term instead of trading every day or every few days. I taught them to put in stop losses so they can watch their investment grow without worrying about losing out if the value of the stock suddenly plummets. The USA Today article points out a study that looked at results of active traders between 1991 and 1996 when the market averaged 17.9 percent. Those who traded the most had an average of just 11.4 percent, while those who traded less often boasted 18.5 percent returns.
I’m confident my sons will become good do-it-yourself investors. They know they shouldn’t try to “get rich quick” by investing in penny stocks. With real estate, the secret to success is “location, location, location.” But with investing, the secret is to diversify, diversify, diversify. After drilling them with sound financial advice, I am confident I’ll have children who can take care of me in my old age.
More from this contributor:
Un-Baby Boom Means Less Social Security Later
Social Security Isn’t Worth Saving
Buying an Investment Property