FROM AN EARLY AGE, my son showed an interest in business and investing. As a toddler, he’d watch CNBC with me. When my wife and I discussed legal and accounting issues, he’d have his “listening ears” on. (Yes, our dinner table conversations are pretty exciting.)
By the time he was eight years old, he was giving me investing input. He thought Microsoft overpaid when it bought Minecraft maker Mojang for $2.5 billion in 2018. He’s always been bullish on Nike, given his affinity for Kevin Durant and Kyrie Irving sneakers.
When he was age 11, we opened a Uniform Gifts to Minors Act account with $1,000, so he could put his investing ideas to work. He put $500 in two individual stocks and invested the other $500 in an S&P 500 index fund. While the account has grown nicely over the past three years, much more value has come from the lessons he’s learned, including these four:
1. A $100 stock isn’t necessarily better than a $10 stock. When we first looked at stocks, my son assumed that a stock with a higher share price was better than a lower-priced stock. I taught him instead to look at share prices based on various valuations measures and then make comparisons across companies.
To keep our analysis simple, we focused on two measures: price-earnings ratios and dividend yields. In addition to quantitative analysis, he put his personal viewpoint to work. Of the $500 earmarked for individual stocks, he invested half in Nike based on his views of the brand’s growth potential, and he invested the other half in ExxonMobil based on its dividend yield. You guessed it: He’s a value investor at heart.
2. The power of compounding. Upon placing our trades, my son had an a-ha moment when he faced a simple question: “Reinvest dividends?” I explained to him that, when he answers “yes,” any dividends would be invested in additional shares of the company. That promoted him to ask, “Will the dividends I reinvest also have a dividend paid on them?” That was the day the power of compounding was ingrained in him.
3. The value of diversification. While Nike’s stock has climbed more than 75% since my son bought it, Exxon Mobil’s stock has slid roughly 25%. While a two-stock portfolio is by no means well-diversified, it’s been good for him to see how the poor performance of one stock can be more than offset by the strong performance of another. This divergence in performance has also highlighted for him that you can’t just focus on your winners in evaluating a portfolio’s performance.
4. The benefits of indexing. While the overall return of his two stocks has been decent, the S&P 500 index fund that he bought on the same day has performed far better. While he had reasonable ideas in making his initial investment selections, this outperformance by the broader market has taught him that selecting an index fund is a prudent approach to investing.
I’ve been able to explain to him that owning this index fund—which includes some Nike and ExxonMobil shares—allowed him to benefit from the strong results of many companies that we didn’t select. He’s also seen the benefits of the fund’s broader diversification, and how its performance has been far less volatile than his two-stock portfolio.
Kyle McIntosh, CPA, MBA, is a fulltime lecturer at the California Lutheran University School of Management. He turned his career focus to teaching after 23 years working in accounting and finance roles for large corporations. Kyle lives in Southern California with his wife, two children and their overly friendly goldendoodle. His previous article was Shifting Gears.