How will your kids learn to invest? Investing for beginners is easier to learn and safer with feedback and guidance from an adult — like you.
The key thing you bring to the table is adult common sense. Sure, it’s helpful if you’re also an experienced investor. But it’s that school-of-hard-knocks experience as a grown-up that’s important. You can teach your kid when to adjust with securities.
What makes this relevant now? Fidelity Investments debuted a commission-free brokerage account that lets 13- to 17-year-olds trade stocks. It’s probably only a short matter of time before Fidelity rivals start to unveil their own versions of investing for beginners who happen to be teens.
Investing For Beginners: Not A Game
“I think overall it’s a great thing to let people 13- to 17-years-old run their own investment accounts,” said Sandi Bragar, managing director of Aspiriant, in the firm’s San Francisco office. “But you’ve got to weigh the pros and cons, one kid at a time.”
One key risk is that teens can treat investing like a harmless video game. But real investment accounts can be expensive.
“One thing that has emerged in the marketplace is the gamification of investing,” said Kelly Ryan, head of independent wealth management at State Street Global Advisors, the financial custodian and provider of the SPDR exchange traded funds. SSGA does not deal directly with individual investors. Gamification is the use of video game-like tools such as “rewards” and “high scores” to keep people interested in an activity like investing.
Easier To Invest
Ryan added, “There are pitfalls in gamification. But if it’s done right, it can be an educational opportunity to build good habits.”
The solution? “The important thing is for parents or other responsible adults to be involved,” Bragar said.
Ask Lots Of Questions
You should not just hand the passwords to a live account to a youngster, advisors say. Dialog beforehand is essential. “Ask your youngster what they want to invest in,” Ryan said. “Are there industry sectors that they think have potential? How about individual equities? Are they more comfortable diversifying with ETFs or mutual funds?”
There are additional key questions to ask. “One place to start your conversation is by asking how much your kid wants to invest,” Bragar said. “And where will he get the money? Is the parent simply going to stuff money in and give the kid free rein? Or will your kid’s money come from savings or a job or gifts?”
New Teen Account Isn’t The Only Option
Fidelity’s new account is not the only method open to investing for beginners. One alternative is a 529 account.
529 accounts are tax-sheltered the way that Roth IRAs are. Earnings grow tax-deferred. Withdrawals for eligible education expenses are tax free. Depending on your state’s tax rules, contributions may be tax deductible at the state level. But your investment choices are limited to the typically modest menu offered by your state’s 529 plan, Ryan says. And while you can brainstorm with your offspring about which investments to select, your child, who is the account beneficiary, cannot control the account or make its investment choices.
Further, owners of a 529 account are generally limited to just two investment trades a year.
Investing For Beginners With UTMAs And UGMAs
Custodial accounts are another way to get started in investing for beginners.
The main ones are uniform transfers to minor act (UTMA) and uniform gifts to minors act (UGMA) accounts. One key difference between 529 and custodial accounts is that money withdrawn from a 529 must be used for educational expenses. If you use the money for other purposes, you get hit with tax penalties.
Custodial account money can be used for noneducation purposes. But the accounts do not enjoy tax breaks that are as big as 529s’.
Basically, parents who set up a UTMA or UGMA control it until its beneficiary reaches that state’s age of majority. Then the kid gains control. Most large brokers, including Vanguard, offer these types of accounts.
Fidelity Youth Account: Investing For Beginners
Only an adult who already has a Fidelity account can open a Fidelity Youth Account. The adult can close the Youth Account any time.
Parents can monitor their teen’s account activity. The accounts bar teens from trading non-Fidelity mutual funds, corporate bonds, municipals, Treasurys, REITs, convertibles, leveraged ETFs and inverse ETFs.
In addition, options, margin trading, short selling and penny stocks are among the securities and methods that are off limits.
Robinhood, the online trading platform that infuriated traders by halting GameStop (GME) trading early this year, requires customers to be 18 or older.
How One Pro Introduced His Kids To Investing
Like a sharp-eyed hawk leading his fledglings on their first flights, money pro Paul Schatz has been right there while his kids learned their valuable first lessons in investing for beginners.
His 16-year-old son Ryan is a computer enthusiast. “He builds his own computers and knows firsthand that Advanced Micro Devices (AMD) makes better chips than Intel (INTC),” Paul Schatz said. Ryan did “a ton of homework on AMD and figured it would be more valuable than Intel.” He began an AMD position in the 20s in August 2018, in a UTMA. He’s still holding them as they trade in the 70s.
Younger brother Dylan, who just turned 13, wanted to buy Tesla (TSLA) when its share price pulled back in February 2021. “It was still above 800. I told him to wait until it got under 500,” Paul Schatz said.
Shares got as low as 539.40 in March. Now they’re around 600. “It’s possible he may never buy it,” Schatz said. “But he’s learning valuable lessons about patience, valuation, herd mentality and momentum.”
He’s off to a good start in investing for beginners.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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