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Young people have a crucial advantage when it comes to investing – time. With more time, investments have more opportunity to grow, enjoying the power of compound interest. Yet how can young people invest wisely, especially those with less experience than older investors?
Perhaps you want to educate your child, nephew or another young person on how to avoid some of the mistakes you made as an investor – guiding them towards greater success. Below, we offer some ideas to help older, wiser investors teach the next generation about investing prudently.
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Help them to feel the excitement
Many young people, understandably, want to take life by the horns and enjoy new experiences such as travel, buying a first car or parties. These often seem so much more exciting than putting money away for years, with no apparent pleasure in the short term.
One way to help change this mindset is to help young people understand that, by investing, they can become “owners” of many of the things they love. Do they care about the environment, for instance? Then how might they feel about claiming to be a part-owner in an EV company?
Another idea is to do some quick “napkin” maths with a young person, showing the potential for their money to grow. For instance, suppose they invested £10,000 and it grows by 10% per year. By year ten, their investment could stand at £27,000 – nearly three times as much.
Some investors like to invest on their child’s behalf whilst they are under 18 (e.g. in a Junior ISA). As the child matures, the parent can point to real numbers showing how to initial investment sum has grown over the years. The implication is clear – carry on doing what I am doing, and this will grow even more!
Let them practice
One of the best teachers in life is failure (as much as parents might want their children to avoid their own mistakes!). Even famous investors, such as Warren Buffett, have learned the hard way many times. The key is to help young people fail so that they get back up again, stronger.
Many online investment platforms let investors build portfolios using “virtual money” (e.g. £50,000). This feature can be helpful, to an extent. Experimenting can help a young person understand some of the basics about stocks, funds, fact sheets and exchange rates.
However, investors will make different decisions with virtual money compared to real money. After all, the latter hurts your wallet if you make a loss; the former merely hurts your pride. Therefore, some investors like to let their children invest using real money – enough to be motivated to succeed, but not too much that it would be catastrophic if they lost everything.
Give them a great education
Here, we are not talking about private school. Rather, we are emphasising the importance of financial literacy and education to help young people succeed as investors.
In 2023, young people often get their investment advice from the likes of TikTok, Reddit and Instagram (from “finfluencers”). A lot of the content falls into the category of “get rich quick” rather than sound, principled investment wisdom.
As an older investor, how can you guide a young person? You could recommend good books, podcasts and videos, of course. Yet what about the knowledge they might gain from your life? Simply by spending time with you, a young person could learn a huge amount.
For instance, could they attend startup investment meetings with you? Could they shadow a trusted employee in your business for the summer, learning how to research different opportunities and conduct due diligence?
Could you watch interesting films, documentaries and TV series about money and discuss them with your children afterwards – e.g. Becoming Warren Buffett? Dinner conversations can be a great opportunity for this.
Stress the key principles
Whilst funds, companies and startups will change over the years, the core principles of investing will likely be around until today’s young people are old and grey. By highlighting these repeatedly, older investors can help newer ones to get started on a strong footing.
Diversification is a key principle, of course. Many young investors will not know how to “spread out” their investments appropriately. You can help them understand the right balance they need when choosing startups, stocks, asset types, countries and markets.
Risk management is also vital. Some young investors will be overly cautious or overly confident about investing. They might misunderstand their general risk appetite, or not fully appreciate the risk profile of an investment opportunity. You can help them to ask the right questions.
Finally, encouraging a long-term mindset with also help young people to stand in good stead. Here, it can help to set some goals. For instance, if you invest £20,000 today, how much do you want it to be worth in 10 years?
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