Investing for Kids: Risky or Responsible?

Shlomo Weiss’s teenage son Dovid approached him and explained his grand plans to invest his bar mitzvah money. Dovid was excitedly talking about investing in Tesla, Apple, and Zoom stocks, mentioning that his friend had doubled his account doing the same. Shlomo wasn’t sure how he felt about this. Perhaps it would be a good learning experience for Dovid to invest his savings and learn about finances firsthand. After all, would it be better for the money to sit in the bank earning next to nothing?

What’s the best way to invest a child’s money? And is stock speculation a good teenage hobby?

Very Different Options

Investing can be intimidating. But leaving money rotting in the bank is a financial decision, too. Throughout history, inflation has eroded far more value than the stock market ever could. Shlomo can benefit his son with little fuss by investing in conservative mutual funds. This simple path has been a winning strategy for decades.

Whether to help Dovid invest in single stocks is a more nuanced question. Trading stocks is much riskier than purchasing vanilla mutual funds. It’s questionable whether Dovid can learn anything from such an endeavor. On the contrary, a youthful entry into a world of speedy financial gains and losses can be harmful.

Safe, Simple Investing

While the stock market can be extremely volatile, diversified moderate-growth portfolios (using indices of 60% US stocks and 40% treasury bonds) have had remarkably solid returns. Based on over a century’s worth of data, studies have noted that such a portfolio has never had a loss over the long term (more than ten years), while enjoying average returns in the range of 7–8%. That’s an extraordinary record, considering you can assemble such a portfolio today using index funds in 10 minutes and at minimal or no cost (Fidelity Investments offers index funds with no fees or minimums). While past returns do not guarantee future performance, you are making a very reasonable bet by investing your kids’ money in a conservative mutual fund portfolio.

Volatile Stock Gambling

As a whole, the stock market has made good money for patient investors. But what Dovid wants to do may be more gambling than investing. Anything can happen in the short run, especially in any individual stock. For every booming company (think Amazon), there are many busts of once-promising firms (think Blackberry and thousands of others). Does a casual young investor know how to discern the difference?

Furthermore, even the stocks of the best companies can collapse suddenly, completely unrelated to their day-to-day business operations. Amazon has given its investors a volatile ride, spending much of the past few decades in negative territory before zooming to new heights. On the other hand, stock prices for companies with terrible prospects can skyrocket based on shifts in mass perception. For those who don’t do reasonable research, betting on unknown and uncontrollable events in the hope of a quick payoff sounds suspiciously like activity Chazal discouraged.

Avoiding Bad Chinuch

It’s great that a bachur wants to save and invest instead of spending, but a drive to pursue fast money with the chance of losing it all is not healthy. In fact, brain experts believe that many stock traders (versus long-term investors) are stimulating the same part of the brain as gamblers in a casino! Educated and disciplined traders are simply pursuing their professions, but the casual investor is much more likely to fall into the gambler category. And while it’s presumably more “kosher” to gamble on stocks than cards or horses, it’s hardly good chinuch to nurture that impulse.

A Possible Middle Ground

If your kid’s desire to invest is based on real research into the economics of the companies and stock market patterns, it may be a different matter. (Full disclosure: avid readers will recall that I did some of that once I hit age 18.) This may be more akin to regular business activity, like getting a summer job as a lifeguard or opening the proverbial lemonade stand. Even in that case, some parents feel that any form of moneymaking is distracting for kids, and best left for adulthood. The stock market is especially alluring because of the gambling component discussed earlier.

If a teenager has their heart set on it and the patience to read and analyze numbers, research-based stock investment isn’t the worst they can get themselves into. But it’s unlikely to provide the thrill and bonanza they may be seeking. For most kids (and adults), sticking to simple mutual fund portfolios is the way to go.

Want to dig deeper?

Try these related articles

Kids’ Cash: It’s No Child’s Play

Teaching Kids Good Money Habits

Rules for Beginner Investors

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