Investing In a Volatile Market - An Initiative Learning For Our Children
The pandemic has got us thinking that nothing is permanent and forced us to evolve or adapt. We, as a parent, realized that in the challenging conditions of the pandemic, our savings and financial stability played a significant role in surviving. Yes, we are still doubtful about how long it will impact our country's economic condition. Evidently, when we were children, we received knowledge from our parents about money management.
Now it is our time to generate financial literacy among our children to be financially dependent in the future. As we have understood that learning is a cycle that prepares us for the upcoming scenario, teaching our children about the financial aspects like investment will always help them in their present and the future.
Saving allows us to meet our contingency needs; similarly, the investment will enable us to make money for our savings. Here, we will discuss the crucial aspects of investment our children can make in the present or in the future.
How will you estimate your children's readiness for investment learning?
As a parent, before starting to pass any investment learning among our children, we need to understand that they are ready to comprehend such information or if we have to teach them from the bottom point. Well, we can gather such information by analyzing our children’s behavior towards saving as well as their spending. By generating investment information in our children, we take steps towards financial literacy.
What is our children's vision in investment for the upcoming five years?
In case you think that it will be too early to teach your children about the investment, then we need to look around the window of houses. Our window view will tell us the real story of financial literacy need for our children.
So, here are some tips that we can use to encourage our children to invest:
Firstly, we need to build a savings base for our children that can be initiated through the small piggy bank.
Don’t forget to ask what they will do with the saved money; you can suggest to them some options like spending it on products or making more money like this. This question will let you understand how mature your child to understand the investment.
If they reflect their willingness to make more money to save more, then we need to ask one more question what if they can keep saving for five years constantly? If they say yes, they are ready, you only have to initiate the investment learning among them.
Secondly, we need to start sharing some basic information about the financial market. This will progressively familiarize our children with the market, how it works, and how it can benefit them.
Don’t depend only on theoretical aspects to teach your children; use images and other multimedia sources for investment learning. This will allow your children to remember the financial concepts. However, multimedia use is also supported by Mayer's cognitive learning theory.
As a parent, we need to ensure that our children will always stay with their commitment for the five years because this is a part of their continuous learning.
Some key learning aspects for our children
We can start with the fundamental aspects of the stock market and mutual fund investment like risk or return, stocks, mutual funds, and diversification. We must remember that essential aspects must not only consist of technical information; it will confuse our children, and then they will develop a wrong perception of the investment process, which will act as a hindrance. The generation of financial literacy among our children must be in a step-by-step format. However, the most effective mode will be to allow them to sit with you when dealing in the financial market.
Risk and return: Risk and return are the basic but the most valuable knowledge of the financial market where we want our children to start investing. Risk is considered as a factor that changes the situation of the market. Risk can be categorized into either good or bad in the financial market. Risk is reasonable when it generates more savings, but it is terrible when it creates threats for the invested amount. On the other hand, returns are the benefits we receive over our investments. In the financial market, the risk is considered as a key for generating more return because increased risk can raise the return on the investment. However, we must never forget that there is no evidence that risk will always generate high returns in the market. For example, if we talk about stocks, we must understand that stocks possess risk, but they can generate good returns.
Investment products: The key investment products that we can use to teach our children can be stocks and mutual funds. They are one of the popular modes of investment in the financial market, and it is possible that our children must have heard about the common stocks or stock market as these are now a part of studies, so it might be thinkable. Stock reflects the fluctuation in their behaviour, due to which they are also recognized as volatile.
We must remember that stock can get impacted due to any economic news and the rumours of the company, so we are required to analyze this information regularly. This will also benefit us to encourage our children to read newspapers and focus on our country's economic climate. Stocks are a part of a company share; the value of the stock represents the portion of the company. The person who buys the stocks is recognized as a stockholder; this person is responsible for buying as well as selling the stocks.
Investing in a more profitable company ensures better returns on the investment. Increased value of the shares benefits the shareholders, but the decreased value of stocks can threaten the invested amount. However, stock renders another benefit: dividend; it is the additional benefit that a company provides to its stockholders. For a company, a dividend is a part of its profits.
However, stocks can be accessed through the broker; some brokers do not allow minors to trade. In such a situation, we can open the custodian account and manage this account for the benefit of our children.
On the other hand, a mutual fund is concluded as a collection of funds collected from different investors. In mutual funds, we can select our children's profitable and secure investment account. To encourage our children, we can open an account on behalf of our children to easily invest money and start saving. In a mutual fund, many investors are invested into different portfolio, which reduces the investment's risk allocation. However, the rate of return might be low or slow compared to the stock, but it will also possess low risk. If you want to encourage your children for low-risk investments, this could be a suitable investment option.
Diversification: Diversification is another vital consideration that we must teach our children as this element will act as a strategy for our children's investment. We parents understand that diversification is a common term that not only works in the financial market but also in an actual situation of the business; it renders some qualitative benefits such as reduction in the risk or loss of business.
The performance of the stockholder portfolio is not dependable on the single stock but the collection of different companies' stocks. It might be possible that you will invest in one company's stock which prices started reducing over a certain period due to any specific reason.
However, here the role of diversification can be highlighted because money will be divided into small parts in diversification. Then these parts will be invested into different company's stocks of varied industries. So, we can comprehend if your money invested into single stock will give you only a loss when the particular company faces loss. Still, if you invest through diversification, if one company faces loss, then other companies’ performance will reduce its impact on your invested amount.
Critical market reflection: We must understand that our teaching will increase the level of curiosity in the mind of children. They will reflect their willingness to demonstrate the stocks and the mutual funds as well investment process. Here, we must ensure that we rely more on graphical or visual representation. This medium will allow our children to learn effectively or remember each activity. However, in the visual presentation, we can include stories of investment based on the process and benefits, and factors required to manage it. We can also teach them about the market and how it works practically.
Readiness: We can conclude this stage as a final step that will improve children's readiness. The requirement of readiness is mandatory so our children can understand that negative experiences of the market will only inform us about what we should do or what we should not practice. A psychological readiness will ensure that our children will not get highly impacted in their early stages of investment due to negative experiences.