- Many children benefit from learning about money from a young age
- Documentaries and social media can help with engagement and scam awareness
Improving financial literacy and awareness about investing is getting a lot of attention. The Financial Conduct Authority worries that not enough people are investing, and has set several targets for boosting individuals’ exposure to stock markets where appropriate. The Financial Times, for its part, has set up a financial literacy and inclusion campaign – FLIC – which it hopes will help young people build the foundations for future prosperity.
But the best start your children and grandchildren can get to managing their finances will come from you. Financial education was introduced to the UK’s national curriculum in 2014, but provision across the country varies hugely.
The explosion of so-called ‘finfluencers’ on social media may have accelerated the need for youngsters to get sound investment advice, too. TikTok, Reddit and Instagram are awash with people boasting about money made through crypto currencies and day trading – encouraging their followers to do the same.
A lot of young adults became interested in markets for the first time during the pandemic. That’s positive, but there are also signs that many think of them as a “get-rich-quick” scheme. There’s a huge job to be done to better prepare young people to understand finance and to recognise that investing is a means to achieve longer-term goals.
How to start
Many parents who put money aside for their children will keep quiet about it until they are older, perhaps revealing it at an 18th or 21st birthday party. But Jason Hollands, managing director at Tilney, thinks this is a missed opportunity – he started started explaining the basic concepts of investing to his children when they were about nine or 10 years old.
This included spelling out what a company is, what profits are, how a company can have many owners called shareholders, the ability to buy and sell shares in some companies on the stock market and to receive some of those profits through payments called dividends.
He has since started talking to them about how markets go up and down over the short term as people feel worried or optimistic. And explaining why when markets fall it’s often a good time to buy: “Children quickly get the analogy that when a price drops by 20 or 30 per cent on some gadget or clothing in a sale, it is bargain to be had,” he says. Many adults don’t follow the same logic when it comes to equity markets.
Most young people have a limited understanding of risk, having grown up in a world where it is usually presented as a ‘bad’ thing. In an investment context, they need to be taught that risk can be their friend as well as their foe. What matters is to take the right amount.
Hollands thinks children often have quite a binary view of risk, seeing the world as a big casino where if you put your cash into equities, you could lose it all. Paradoxically this can have a tendency to drive excessive risk taking, because they assume that if you are going to put your money at risk, then you may as well be bold.
“I’ve taught my children that funds and investment trusts can help reduce risk through diversification and that sensible isn’t boring, because it also gives them a stake in more opportunities from across the globe. I’ve explained that while the value of funds can go down as well as up, there is very little chance of losing all your money in a fund, which would entail every company going bust,” Hollands says. He has not told them how much he has put in their investment accounts, but he shows them performance charts to keep them engaged.
The power of compounding
One basic concept that might not be particularly intuitive is compounding – the sooner young people can get their head around it the better, as that’s how real wealth is built. As Chris Dillow pointed out last year, if you save £1,000 a year at a real return of 3 per cent a year you’ll have just under £37,000 after 25 years. But after 30 you’ll have over £47,000. Saving for an extra five years thus gives you a 100 per cent return on your additional £5,000 of saving.
Showing the chart below to youngsters might help them understand how it works. And with any luck an average return of 3 per cent per annum is conservative, given the MSCI World index has had a compound annual growth rate of 5.8 per cent over the 30 years to 1 October 2021, according to Investors’ Chronicle analysis of FactSet data. But you must also explain volatility with an emphasis on the importance of a long-term mindset - the same 30 year window has seen 12-month periods with drawdowns of over 40 per cent.
Moira O’Neill, head of personal finance at interactive investor and former personal finance editor of these pages, says she’s had most success in teaching lessons about investing through watching documentaries and films and discussing them afterwards.
“Becoming Warren Buffett is a documentary that both my daughters still mention,” she says, adding that they found it very easy to follow and highly engaging. “They feel like they know more about money, why it’s important and how money can make more money through investing.”
In an article in the Financial Times this summer, O’Neill mapped out how she planned to teach her fifteen-year-old daughter four investment lessons, based around three tactics: dinner conversations, documentaries and films, and payment. The first lesson was on how to sift through the good and the bad so-called finfluencers, the second on understanding cryptocurrencies, the third on sensible investing and the fourth on frugal living and financial independence.
The fourth point is spelled out in Morgan Housal’s latest book The Psychology of Money. Housal argues that building wealth has little to do with your income or investment returns, and lots to do with your savings rate. More importantly, the value of wealth is relative to what you need. Social comparison can be a big obstacle to financial happiness (unless you are Jeff Bezos), so if you can encourage children to focus on what they need rather than the aim of accumulating as much as possible or more than those around them, that should boost their chances of achieving financial happiness.
Ryan Hughes, head of investment research at AJ Bell, says most young people’s first real experience with money is a negative one with overdrafts, credit cards and debt, and that parents should aim to impart a more positive experience. “This should include the benefits that long term investment has on the whole economy so that people understand the greater good that investment has rather than simply viewing capitalism as a bad thing," he says.
Nominations for interactive investor's Personal Finance Teacher of the Year Awards are currently open. Find out more and details on how to vote here.