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Financial literacy is of the utmost importance, and many American parents, recognizing this, start teaching their children investment lessons and broader financial education early on. In fact, most parents with children aged 10 and older have already taught them how to invest, according to a new survey. However, this same data also indicates that nearly half of American children are missing out on crucial personal finance lessons (especially given today’s markets), such as the importance of long-term investing.
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A new Motley Fool survey reveals that 50% of parents with children over 10 are teaching their children to invest, and 38% plan to do so when their children are older.
Jack Caporal, research analyst at The Motley Fool, told GOBankingRates that parents should be mindful of teaching their children that investing is more likely to generate positive returns over longer periods of time.
“The current market volatility provides an opportunity for parents to lead by example and teach their children that economic downturns and uncertainty are not reasons to panic,” said Caporal.
The survey finds, however, that while long-term investing is the most common lesson in investing parents teach their children, 42% of parents ignore it – a finding Caporal finds “surprising.”
“Long-term investing is fundamental to successful investing. This increases the likelihood of receiving positive returns and avoids the pitfalls associated with trying to time the market,” he said.
Common Investing Philosophies Parents Teach Their Children
Other popular investment philosophies that parents teach their children include diversification (50% of parents surveyed say the same), “buy low/sell high” (50%), that it’s risky to trying to time the market (29%), and the value of indexing (26%).
Only 5% haven’t taught — or don’t plan to teach — their kids an investment strategy, according to the survey.
Corporal added that understanding investment goals and the philosophy most likely to allow you to achieve those goals is fundamental to becoming a successful investor. He added that The Motley Fool recommends building and maintaining a diversified portfolio of at least 25 good-quality stocks for at least five years, regardless of market volatility.
“It is important for young investors to understand that historically the stock market has experienced declines of 20% every four to five years and about 30% every 10 years. However, the longer you hold an investment, the more you have likely to make a positive come back,” Corporal said. “Market downturns can present opportunities to invest in stocks at attractive prices if investors have been buying stocks through volatility.”
Another key finding from the survey is that parents with investment experience are more likely to teach their children about investing, with 93% of parents saying they have investment experience. having either taught their children about investing or indicated that they plan to do so when the children are older. This figure can be compared to only 50% of parents with no investment experience who say they intend to teach investment principles to their children.
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Corporal explained that surveys and research on “financial socialization” suggest that children pick up on the financial habits of their parents and role models.
“As a result, children whose parents invest — and talk to their children about investing — are more likely to emulate that behavior in the future and become invested,” he said. “This relationship goes both ways. Parents who invest are more likely to teach their children how to invest, educate them on investment strategies, and establish custodial accounts that can be used for hands-on learning.
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