American high school seniors have less knowledge about income, spending, money management, savings, and investing than their counterparts did in 1997. To develop investing savvy, children must be taught by their parents. Since the sooner a child begins saving and investing, the more money s/he'll accumulate over the long-term, it behooves us all to teach our children well.
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Today, those children have become parents. Unfortunately, many of them have not heeded those sage words, at least as far as investing is concerned.
A recent survey conducted by the JumpStart Coalition and the Federal Reserve Board discovered that American high school seniors had less knowledge about income, spending, money management, savings, and investing than their counterparts did in 1997. The hazards of being uninformed, according to Federal Reserve Board Governor Edward Gramlich, is that this lack of financial savvy puts our children at "serious risk of becoming the victim of predatory lenders." It also robs our children of the opportunity to take advantage of their biggest asset as investors -- time. The sooner a child begins investing, the more money s/he'll accumulate over the long-term.
For instance, if a child invests $100 of birthday money at the age of 15, the long-term results are impressive. The following table shows a few different growth rates: 5% is the anticipated return if that $100 is invested in a money market account or bonds; 10% is the average return rate of the stock market; 15% is a little better than the average stock market return; and 20% is the return a knowledgeable, aggressive investor might see.
Age 5% 10% 15% 20%
15 $100 $100 $100 $100
20 $128 $161 $201 $249
25 $163 $259 $405 $619
30 $208 $418 $814 $1,541
40 $339 $1,083 $3,292 $9,540
50 $552 $2,810 $13,318 $59,067
60 $899 $7,289 $53,877 $365,726
65 $1,147 $11,739 $108,366 $910,044
That little $100 bill would have become more than 9,000 hundred-dollar bills ($910,000) at age 65 with a 20% return. Now that's a return worth waiting for!
To have the savvy to begin early, children must be taught by their parents. While it would be ideal if the school curriculum handled the matter, as Fools, we can never expect someone else to handle that which is ultimately our responsibility.
Some parents mistakenly believe that their children should be spared from the stress of thinking about money. But that attitude only perpetuates investing irresponsibility.
One problem in this scenario is that so many adults don't understand the world of investing themselves. It's hard to teach what you don't know.
The corporate advertising firm, Doremus, recently conducted a survey of 400 investors and came up with the following sad, but true, results. Of investors, not the general public, 50% of respondents thought that SYSCO Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SYY)") else Response.Write("(NYSE: SYY)") end if %>, North America's largest provider of food to the foodservice industry, is a technology company. Many of them believed that Caterpillar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> is a pet company, and that Halliburton <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %>, the world's largest oil-field services company, is in the fish business. That one's hard to figure, even for those of us who prefer our tuna canned in oil.
When parents do teach their children about investing, the results can be impressive. Seventeen-year-old David Leung started investing at the age of 10 when his parents gave him $7,000 in Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> stock for winning a math contest. Over the years, as he watched his friends blow their money on cars, clothes, and music, Leung invested that $7,000, plus an additional $43,000 -- earnings from gifts and jobs installing, repairing, and assembling computers. That $50,000 is now worth $450,000.
Over the past seven years, Leung has learned how to value stocks, and looks for industry leaders with a price-to-earnings ratio (P/E) close to their earnings growth rate. He believes it's impossible to predict the direction of the market, and that it's safe and more profitable to hold for years. What a Fool!
On the other end of the spectrum is Jonathan Lebed, the 15-year-old who is being investigated for stock manipulation. Jonathan played the penny stock game of pump and dump by purchasing thinly traded stocks and hyping them in investor chat rooms. As other investors bought the hyped stock, he'd sell. Jonathan wouldn't admit or deny the allegations, but agreed to pay back what he had earned plus interest. According to a story in The New York Times, Jonathan's father "waved away the incident's seriousness" instead of helping him understand the illegality of his actions. Teach your con men well.
You can learn more about educating your children in the Fool's "Investing for Your Kids" area. Here is some guidance we've received from young investors telling us how they'd like adults to interact with them when it comes to teaching investing:
*Don't overdo it; stay low-key
*Don't talk down to kids
*Make sure everyone's nice
*Don't give confusing or boring explanations
*Keep it short -- don't ramble
When the time comes to sit your kids down to discuss the birds and the bees, throw in a little chat about the bulls and the bears. It will be more profitable and a lot less embarrassing.