Adult Children Move Home? It’s a Good Time to Teach Investing
Whether it seems like it or not, as a Baby Boomer your children likely value your opinion…at least about some things. According to GfK Roper, a market-research agency, Boomers are a leading generation of “Influentials.” The agency defines Influentials as well-informed and trusted opinion leaders that impact how others around them view products, services and ideas. Boomers are top consumer categories that include real estate, travel and, most importantly, finance/investments.
Here, the Boomer generation can be a positive influence on the aptly named “Boomerang” generation. In the midst of a recovering economy and job market, a Pew Research Center analysis of U.S. census data shows 36% of 18- to 31-year-olds were living in their parents’ home in 2012. If this sounds like your home, consider it an opportunity for “the talk.” That is, the talk to help your adult children learn to control their finances and invest wisely. The lesson is much needed as the average graduate is saddled with close to $30,000 in student debt, according to the Institute for College Access and Success.
Teaching your adult children to become informed investors could pay dividends as they will likely be in better position to assist you during the later stages of life. Plus, maybe you’ll also learn or relearn a thing or two. Here are suggestions on how to talk investing with your adult children.
Start with the basics
In order to find out just where they can use your advice, ask about their current financial situation and start explaining the basics, from spending less than you earn to the definition of a mutual fund.
Things to do/discuss:
- Emphasize the three S’s of financial independence: save, save, save.
- Formulate a plan for their debt; paying off debt provides a great investment return.
- Create a detailed budget of weekly expenses.
- Write a list of financial goals, both large (own home, of course, retirement, etc.) and small (travel, new computer, etc.).
- Stress the need to take advantage of a 401(k) employer match; it’s the only 100% return on their investment they’ll likely ever see.
- Explore the power of compound interest, or what Einstein called the “eighth wonder of the world.” With such a long time horizon, twentysomethings can substantially grow their money by earning interest on interest. Use the compound calculator on the Securities and Exchange Commission website to see just how much.
- Warn about the hazards of investment costs; the less paid in costs, the greater share of returns kept.
- Instill the importance of investment discipline. The average investor mistakenly sells during market lows and buys during peaks, according to research firm Dalbar.
- Cover basic investment terms. What is a mutual fund? What is an asset class? What is the relationship between risk and return?
Go through your own finances and investments
The best way to teach may be to lead by example. That means being open with your own finances. Open up your portfolio and let your adult children take a look at how you invest.
Things to do/discuss:
- Provide a list of your own financial goals. How close or far are you to reaching them?
- Tell stories about your investing mistakes. Were they behavioral or strategic? What did you learn?
- Draw out your asset allocation, and explain what it means and its importance.
- Show them the investments in your portfolio and take a look at their prospectuses.
- Walk through your spending and saving habits, or how you divvy up your paycheck or portfolio withdrawals.
- If you have an investment adviser, explain why you use them and what they offer.
Put things in their perspective:
It’s important to understand who you are talking to. While your adult children may have reclaimed the basement, they’re likely not slacking off but rather busy launching their careers or the newest tech startup. But, having been affected by the repercussions of the 2008 financial crisis, they are generally more altruistic and cynical of Wall Street. Therefore, try to frame the investment talk to fit their perspective.
Things to do/discuss:
- Like the latest mobile app, portfolio rebalancing is a relatively simple strategy to learn – once or twice a year reset investments to their original levels as a way to buy low and sell high. Setting a recurring reminder on your smartphone can help you remember when to rebalance.
- Index investing can be less time consuming and more transparent. Index funds seek to capture the returns of entire market index, which eliminates the need to monitor prices in hopes of timing the market and lets investors know exactly what they are buying.
- Avoid the rat race on Wall Street and instead focus on what you can control such as costs and behavior.
- As an investor, you can take part in the capitalist system and be socially responsible.
Turn teaching into practice
After all is said and done, encourage them to open up an individual retirement account so that they can start employing the principles you’ve taught them.
Help continue their investment education
Learning should never stop. These books offer not only a great introduction to managing money, but they are also useful over the lifetime of any investor:
- The Richest Man In Babylon by George Clason
- The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John Bogle
- The Investment Answer by Daniel Goldie and Gordon Murray
- If You Can: How Millennials Can Get Rich Slowly by William Bernstein
As financial author William Bernstein writes in his book, If You Can, your children should start saving 15% of their salary at age 25 into a retirement account with three equal amounts invested into a U.S. total stock market index fund, an international total stock market index fund and a U.S. total bond market index fund. Then, your children should “almost certainly beat out most professional investors” and “likely accumulate enough savings to retire comfortably.” Hopefully, in the comfort of their own home.