A very common reason for investors to focus on their portfolios is for the benefit of the next generation. They want to ensure that their children are well taken care of so that they, the investors, don’t have to worry later in life.

Taking it another step is teaching your children about investing. You can help them understand the guiding principles, and why it is so important to think about investing –for their present and their future. This is a golden opportunity to start them on a solid financial path. Where to start in discussing investment basics with your children largely depends on their age and maturity. That said, there are effective approaches for children of all ages. Here are some ideas:

Start with savings.

Savings should come before investing. Make sure your children have a firm grasp of the importance of saving. If they have a regular job, discuss with them the idea of setting aside about 10% of their earnings. Consider opening a savings account for them and discuss how interest works. These are important first steps in learning how to manage money. Once your children have a savings plan, investment topics will come more easily.

Keep it simple.

As obvious as this seems, use your children’s language, not sophisticated financial terms. Start by explaining to your children that investing is a means of using their money to create more money. Keeping it simple will help your kids to understand and embrace the concepts.

Use a real goal.

Make investing real by focusing on a tangible goal. Chances are your children already have something for which they are working and saving. Depending on the age, it could be a new doll, the hottest video game, or their first car. By showing them how investing money on a regular basis can help earn more money to achieve their goals, you’re more likely to catch — and keep — their attention. Set financial milestones on the way to reaching their savings goal, and talk about each milestone when your child reaches it. Many children are visual and posting a “Savings Graph” that shows their progress is a fun way for you and your child to track their savings.

Explain stocks with familiar companies.

Kids are drawn to the idea that buying a stock means buying a piece of a company — the stock can rise or fall as the company succeeds or fails. If you tie the concept to a company with which your children may be familiar, say a sports company, computer manufacturer, or food and beverage company, they might be more interested in following its progress. You might purchase a single share for them so they can experience ownership first hand.

Try virtual investing.

That said, you don’t need to actually purchase a share of stock; rather, you can show your children how to research stocks online. Once again, choose companies whose products are familiar and, this time, have them “buy” 10 shares of a few companies they like. Record the “purchase price,” monitor the performance and, after a while, have them calculate how much they gained or lost.

Open a custodial account.

To give your children some real investing experience, consider setting up a custodial account under the provisions of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act (depending on your state). You can start the account with a small amount of money and then add contributions from their already established savings plan or other gifts.

As you and your children explore investing together, remember to have fun and keep it light, emphasizing the following:

Long-term investing: Any market has natural ups and downs, but the longer you have to invest, the greater chance you have to ride out these market movements. Historically, over time, investing has been an effective way to help your money grow.
Compound growth: As earnings are reinvested back into your original investment and the aggregate amount keeps earning, it’s kind of like a snowball that gets bigger as it rolls downhill. The earlier you start investing, the greater the snowball effect.
Diversification: It’s risky to put all your eggs in one basket — it’s probably not a good idea to invest all your money in the hottest video game or clothing company. If the company falls on hard times, you could lose your entire investment. A great way to minimize risk is to spread your money across different types of investments.

Teaching your children about saving and investing can be fun and, in addition, profitable in the long term.

Reesa Manning is a Senior Financial Advisor at Integrated Wealth Management. For more information, call Reesa at (760)834-7200, or [email protected]. Integrated Wealth Management, Inc. is a Registered Investment Adviser.