Our clients that are parents and grandparents are always eager to see their kids start on their own journey of investing. Some even choose to provide the seed money to get them started.
Many times, their initial thought is to take a “hands-off” approach so that the child — often a teenager or young adult — can learn their own lessons. Given the current environment, I would recommend that the parent or grandparent get a little more involved. Don’t assume because the young person says, “I’m good,” or, “I have an app for that,” that they really are making sound decisions.
Many new investors have trouble distinguishing between gambling, speculation and investing. If you compared the demographic makeup of sports bettors to the customer makeup of the more popular brokerage apps, you’re likely to find a lot of overlap. But there is a huge difference between betting on sports on a gambling website and owning stock in a gambling website.
Gambling usually involves a very high level of risk and a very short timeframe. Usually, gamblers don’t purchase an asset, but simply wager on a certain outcome within a small window of time. Stock options near their expiration date might fall into this category. Most people have seen a person on a gambling commercial or billboard winning lots of money, making it look easy. But in reality, most people’s gambling experience usually results in a drastically different outcome.
Speculation is one step up from gambling. When someone is speculating, there may be an actual asset purchased, but it is still usually purchased with an extremely high risk/reward ratio. Usually, it’s done with a short-term time horizon, from someone looking to “get rich quick.” The purchase of “penny stocks” (stocks with share prices under $5) would usually fall into this category. Buying ownership in companies that the market has already made a negative judgment on is rarely a winning investment strategy.
Investing is distinct from both gambling and speculation. Investing involves the actual purchase of an asset, not just a bet on its directional move. It is usually done with a more long-term focus and the expectation of having a positive financial return. Most of the time, investors do so in a diversified way.
A gambler might buy a single asset in hope of a tremendous rise in value. A speculator might look to only invest in one or two companies. But an investor will usually spread their risk among several different companies, and possibly several different asset classes. While that doesn’t totally eliminate risk, it does help have a much stronger chance of a positive outcome.
If you have taken a hands-off approach, you probably assume that your kids have started investing. If you dig a little deeper, you may find is that they have actually started gambling or speculating. You may also find that they don’t know the difference.
My experience is that learning the difference between those things is what separates successful investors from unsuccessful ones. Unfortunately, many young investors don’t learn that lesson until later in life. If you get a chance to help your kids learn that lesson early, you should take the opportunity.
If you have a good financial advisor, one of the best things you can do for your kids is to introduce them to your advisor and help get them started in investing. If your advisor is unwilling to help your kids or grandkids get started, it may be time to find a new one. Your kids will thank you one day.
For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Blvd. in Franklin. We can be reached at 615-905-4585.
Opinions expressed are those of the author and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Some investments mentioned may not be suitable for all investors. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment.
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