Teaching a teen to trade (and invest)

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PiggybankI hope you'll excuse my title. I know we're mainly investors around here, not traders, but the title "Teaching a Teen to Trade" is so much more alliterative than "Teaching a Teen to Invest". And while I'm making my apologies, I hope my daughter will excuse the "new dog" allusion in the subtitle -- because she's lovely.

Anyway, I started thinking about this article when my precocious daughter -- who turned 16 this month and who, for some reason, is currently teaching herself to play poker and "count cards" (for fun, you understand) -- said to me:

"Hey Dad, you do stock and shares, don't you? Will you teach me all about it?"

So I set about devising a lesson plan that would allow me to teach my teenager to invest to save her from having to follow me through my own attendance at the expensive 'investment school of hard knocks'. (As an aside, even that school is probably no more expensive than a university degree these days)

Here is the outline lesson plan I've come up with:

Lesson 1: Essential reading
As she's in no rush (although she might argue otherwise) and her options for real-life trading and investment are limited by the facts that she is under 18 and has no substantial income or assets, I think she can afford to do lots of background reading.

I would start her off on some of the more readable general texts like Robert Kiyosaki's Rich Dad, Poor Dad tale, to emphasise the importance of investing in income-producing assets rather than frittering away money on depreciating status symbols.

While I'd try to find some teen-friendly alternatives to the Benjamin Graham et al "value investing" classics, I would also not be averse to throwing in some of the more trader-oriented texts on alternative role models including Jesse Livermore. I believe that an open-minded approach to taking the best from various disciplines is ultimately more beneficial than a preconceived notion of "the one right way".

Lesson 2: Pearls of wisdom
In this lesson I would emphasise the key messages that I have distilled from those books and from my own practical experience. Things like:

  • The fact that the market is a short-term voting machine and long-term weighing machine.
  • The importance of diversification.
  • The need to counter-intuitively "run your profits and cut your losses".
  • The folly of "averaging down", unless you do it safely.
I'm sure I'll think of some more pearls of wisdom, and I bet you can as well.

Lesson 3: Driving with Dad
All of the background reading and theoretical instruction in the world is no substitute for hands-on practice, so in this lesson we would put fingers to keyboard -- together.

My preferred training vehicle would actually be a spread betting account, because it allows you to take many positions in different stocks with very small amounts of starting capital. She can't have one of those until she's 18, but I suppose that a 'demo' spread betting account would be a possibility that would do no harm. If it did do some harm, it would only be virtual harm, and getting her virtual fingers burned would teach her some valuable lessons.

Since we're effectively talking about paper trading here, she could just as well run a more investment-oriented virtual portfolio using the Google Finance Portfolio with its ability to factor in dealing costs.

If she wanted to invest some real money -- and there's no better way to feel the real emotions associated with trading and investment -- then maybe we could open a Self-Select Junior ISA, like the one offered by Reyker Securities.

Once we'd chosen our practice vehicle, the initial emphasis would simply be on operating the controls: opening and closing positions which I -- not she -- determined that we should open or close 'at the market' or when a particular price level (or other criteria) had been met. She would learn what to do while leaving me to worry about why we were doing it.

Lesson 4: Flying solo
Having mastered the tools of the trade whatever form that took in the previous lesson, in this final lesson my daughter would fly solo by also deciding what to trade (or invest in) and when. Here, we complete the training cycle by applying the background reading and pearls of wisdom (lessons 1 and 2) to the practical order-placing and account operation that was taught in lesson 3. Now she's on her own, until I hear the immortal cry...

"Dad...?"

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