As winners of the online competition The Stock Market Game in Rhode Island, Amelia Spalter and Brooke Mongeon, both 14, were recently anointed the best middle school student investors in the state.
Impressive accomplishment, for sure. But what's even more remarkable than their big win is the speech the precocious (and audacious) Amelia gave when she accepted the first place award:
"When it comes to the phrase 'Always start 'em early,' in my case, the proof is in the pudding."
With those words, this RIIR (Rhode Island Investment Rookie) revealed perhaps the most important ingredient for any wealth-building recipe: youth.
Why Kids Have the Advantage
It's not that kids are better stock pickers. While super smart (and hardworking) kids like Spalter are awesome, not even they can outguess the stock market consistently.
But children do have time, which is an advantage that money can't buy.
If you start saving and investing money when you're young, the money has more time to grow.
And when your interest earns interest year upon year, decade upon decade, that money is able to compound year upon year and decade upon decade.
Here's a cool example: Say you put $1,000 into a tax-free investment account for your 10-year-old daughter, and you do it each and every year until she reaches age 20 -- a $10,000 investment.
At that point, you stop, never invest a penny more, and simply allow the money in the account to grow for 30 years, until your daughter reaches age 50.
The result: There would be $157,435 in the account, assuming an 8 percent rate of return.
Now what if you didn't start saving for your girl until she was 20 years old, and from then on contributed $1,000 every year for the next 30 years -- a $30,000 investment?
When she hit 50, the account would contain just $122,346, assuming the same 8 percent return as the previous example.
The Benefits of Compounding Interest
So how could that be? It feels intuitively wrong. How could putting away $10,000 result in so much more money than putting away $30,000?
The answer is that the $10,000 had many more years to compound.
The point: When money compounds for a long time it grows exponentially.
In fact, Albert Einstein called it the eighth wonder of the world. (For a fun -- and kind of gross -- visualization of exponential growth, you can show your kids this video of bacteria multiplying.)
Of course, there are a few caveats to this example. Inflation plays a role, there are no ways to guarantee getting 8 percent (or even close to it) right now, etc.
But the point still holds: Starting early is the smart way to invest.
Does the Stock Market Game Work?
Still, you may wonder, does playing The Stock Market Game, which allows kids to create an imaginary portfolio filled with real stock investments (they work in teams and compete against others around the world), offer a good way to teach kids about saving and investing?
My answer is two-fold.
There's no question that this online Wall Street simulation -- created by SIFMA, a foundation that's an offshoot of the trade association for stockbrokers -- can get kids intrigued about the stock market.
This year, more than 700,000 students played The Stock Market Game in schools across the country.
And a 2009 industry-funded report found that students who played the game scored higher on math tests based on those administered by the U.S. Department of Education than their peers who did not play.
Still, Princeton economist and chairman of the Council of Economic Advisors Alan Krueger is not completely sold.
Last year, he spoke to the President's Advisory Council on Financial Capability, of which I'm a member, and said: "The good news is it teaches them about financial markets and what the role of financial markets is, and they could understand a little bit more when they hear reporting on the stock market."
He continues, "The bad news is, if you have a contest for who could have the highest return in your class, you have an incentive to look for a high-risk, high-variance portfolio. And I think people take too much risk in their lives."
Buy 'Em and Hold "Em
The fact is, kids need to know that the buy 'em and hold 'em philosophy actually gives you the best chance to accumulate money -- and even that doesn't come with any guarantee.
Kids who play should be told that history shows that people who actively buy and sell individual stocks and try to time the stock market tend to do worse than those who invest for the long haul.
It's Wall Street's well-kept secret -- and one the vast majority of adults don't know -- that even "professional" stock pickers on average do worse after fees than low-cost index mutual funds, which are a fixed, representative sampling of stocks that are not actively traded.
In fact, nearly 70 percent of funds that are managed by active stock pickers failed to beat one of the most popular indexes, called the S&P 500, over the last five years.
(If you or your kid wants a great, easy-to-read book on this topic, try Burton Malkiel's The Elements of Investing.)
I think that if your kid finds it entertaining, The Stock Market Game is definitely worth considering.
But your job will be to remind him (and yourself) that it's not the trading or guessing that really pays off -- since it often doesn't -- but the act of saving early and regularly.
(I also wish that someone would come up with a game that shows how credit card debt is the worst investment someone could make, but that's a story for another time.)
And finally, listen to Amelia. "I couldn't have been more than five years old when the basic idea of the stock market had been explained to me," she said. "By six years old I had a basic framework for growing up with an idea of how to handle my money -- which came out to about 75 cents."
I think Amelia could be an amazing wealth manager, speech writer, or politician one day. That or a comedian!
Beth Kobliner is a personal finance commentator and journalist, the author of the New York Times bestseller Get a Financial Life: Personal Finance in Your Twenties and Thirties, and a member of the President's Advisory Council on Financial Capability. She is co-author of the forthcoming children's book Jacob's Eye Patch (Simon and Schuster, September 2013), which she wrote with her nine-year-old son. Visit her at bethkobliner.com, follow her on Twitter, and like her on Facebook.
This post was originally published on Mint.com.
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