TEACH YOUR CHILD TO INVEST
Many believe we owe it to our families to leave a healthy inheritance once we shuffle off this mortal coil. But CHRISTINA CASTLE suggests it is nobler to leave our loved ones a legacy of investment intelligence and the savvy to create their own retirement nest egg.
My great grandmother’s chicken broth has always been a family favourite. It is a simple recipe from which you don’t deviate. You don’t need to. It’s an oldie but a goodie that has been shared through the generations and always tastes as it should.
I am enormously grateful for the culinary wisdom generously imparted from the family kitchen. But I wish that at least one grandparent, great aunt or uncle instead had the inclination to share the basic ingredients for intelligent investing.
Discussion of money and investments in my family was taboo — you just didn’t do it. Everything I know today, I have learned myself. But I’ve had plenty of help from Dave Foord’s Time in the Markets, with which I have proudly brainwashed my children for years.
Whether your offspring is seven or 27, it’s never too early or late to start the money and investing conversation. Just make sure you have it and have it often. Bring them along to Foord’s annual Meet the Team presentations or read them Foreword when you tuck them into bed.
Start with principles that are easy to grasp, simple to convey and bound to spark a conversation and an interest in investing:
Never lose money. That’s Warren Buffett’s first rule of investing and a cautious reminder to always do your homework for an investment. Never go into an investment prepared to lose. He adds that rule number two is “never forget rule number one.”
To win in the investment game you must first survive. Understand risk and the importance of managing it. Risk is not volatility. Risk is the chance or possibility of permanently losing money. Spend more time worrying about the downside risk in your investments than dreaming about the upside potential.
Compounding is a powerful force. Albert Einstein allegedly said, “Compound interest is the most powerful force in the universe.” It competes with the wheel as one of the most important tools of man. You need to harness this force to become a great investor.
Think in years; comprehend in decades. Time is one of the most important elements in the compounding formula. Give your investments time, be patient with them. Only then will you realise their full potential.
Know and understand the difference between investing and speculation. Investment is easy to do and succeed in; speculation is even easier to do but extremely difficult to succeed in. Speculation is a short holding period and uncertain result. An investment is a long holding period and a more certain result.
Diversification is the only “free lunch” available to investors. Diversification means reducing risk of loss by investing in a variety of assets. Use it as often as possible, but not as much as possible, because too much diversification reduces return.