Teaching investment theory to a child

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Elysium
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Teaching investment theory to a child

Post by Elysium » Thu Dec 03, 2015 2:20 pm

My son turned 13 this year and we have been discussing investments and finance lately. I have explained the basics of capital markets in bits and pieces to him, as much as a 13 year olds attention span on these topics can tolerate. The good thing is that most of these topics are initiated by him. Anyhow, this year I decided to give him some money to invest and offered to start up a custodial account where I can gift money. I offered him the choice of Vanguard where you get to invest in low cost broad market index fund and earn slow returns over period of time, but he wanted the ability to invest in individual stocks such as Apple, Google, Amazon, or Microsoft. Classic, right?

I tried to explain to him about all the general theroy about uncompensated risks and all the usual stuff. But no, he found my approach very boring and claimed to be more risk taking for extra returns. I decided to let him go and experiment with a small amount which is my birthday gift anyway, so if he squander it away then he would have learned a good lesson early on about investing and capital markets. If I force him to invest in broad market index he may never learn and when he gets his own money he will go after individual stocks.

Anyway, I opened an account with a discount broker and let him buy a few shares of AAPL. He is a firm believer AAPL has many products they are launching that will boost the share price. My obvious answer was that all of this is priced in and the more likely chance is that they will disappoint in earnings and then you lose, and you win only if they come out with a product that is really a breakthrough product.

What would you have done? let him try and learn from a mistake and consider this as tution fee, or continue to advice passive investment and set one up even though he doesn't care much about low returns (in his view).

livesoft
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Re: Teaching investment theory to a child

Post by livesoft » Thu Dec 03, 2015 2:27 pm

I'd let him learn by doing. Make him compare his results to two or three benchmarks. Eventually steer him towards the concept of risk-adjusted returns.

If you like, you can have a contest: Both of you start with the same amount of money, say $500. Then in 3 years whoever made the most gets to keep the other person's money, too. Make sure to spell out what happens if you both lose money, too.
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sls239
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Re: Teaching investment theory to a child

Post by sls239 » Thu Dec 03, 2015 2:35 pm

I guess I would just ask if there is a reason you are letting him run his experiment with real money?

IMO, because there will plenty of inadvertent lessons learned with real money, you should grab the opportunity to use fake money (by tracking the performance of these stocks over time, say) every time you can.

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Re: Teaching investment theory to a child

Post by Elysium » Thu Dec 03, 2015 2:43 pm

sls239 wrote:I guess I would just ask if there is a reason you are letting him run his experiment with real money?
Fake money will have no real learning impact, he will go with classic behavioral assumption that he would do well with real money and the fake money contest didn't show his real skill. I know the real money could be lost, but it's the cost of education, and it's less than $1000.
livesoft wrote:I'd let him learn by doing. Make him compare his results to two or three benchmarks. Eventually steer him towards the concept of risk-adjusted returns.

If you like, you can have a contest: Both of you start with the same amount of money, say $500. Then in 3 years whoever made the most gets to keep the other person's money, too. Make sure to spell out what happens if you both lose money, too.
This is what I intend to do, although I haven't thought about keeping the other person's money, it's an interesting idea.

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Re: Teaching investment theory to a child

Post by livesoft » Thu Dec 03, 2015 2:55 pm

If he gets ahead of you in the contest and is smart, then he will simply mimic your investments thereafter and get to keep your money, too. :)
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Re: Teaching investment theory to a child

Post by asif408 » Thu Dec 03, 2015 2:58 pm

I would play the "Monkeys throwing Darts" game. Let him pick a number of stocks (say 5) and buy 1 share each of them. Then you hang up the money section of the paper showing the stock tickers and throw 5 darts at it while blindfolded. Then buy 1 share in each of those companies that hit the darts and track the performance, seeing how you do compared to him. When you win, boast about it and go around dressed up in a monkey suit with a blindfold on. Make it fun. If you lose repeat the process until you win (which eventually you will unless you are very unlucky). The blindfolded monkeys throwing darts image from Burton Malkiel's book has always stuck in my head, and I imagine it would stick in a teenage boy's head.

Maybe then you can show him over time how it's all very random and a loser's game to pick individual stocks. Then you can move on to teach him about active vs. passive funds.

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Re: Teaching investment theory to a child

Post by 691175002 » Thu Dec 03, 2015 3:02 pm

You have to be careful because results in the market are so random that there is still a near 50% chance that AAPL actually does outperform the market over an arbitrary timeframe. A ton of investors (and gamblers) hit it out of the park with play money and let that confidence lead themselves to ruin.

Picking stocks is not a losers game - paying fees is a losers game. The expected return on a completely random portfolio is exactly the same as the equal weight index.

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Re: Teaching investment theory to a child

Post by David Jay » Thu Dec 03, 2015 3:59 pm

I think some business theory is needed to underpin investment.

1. How do businesses work?
2. What is equity?
3. What is debt?
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Re: Teaching investment theory to a child

Post by Fallible » Thu Dec 03, 2015 5:11 pm

Dieharder wrote:...
I decided to let him go and experiment with a small amount which is my birthday gift anyway, so if he squander it away then he would have learned a good lesson early on about investing and capital markets. If I force him to invest in broad market index he may never learn and when he gets his own money he will go after individual stocks. ...
The better lesson may be if he makes money because the lesson then is that it was luck, not skill. If he can understand what that means, why it is so, and accept it, he may then give indexing a closer look on his own.
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Re: Teaching investment theory to a child

Post by NOVACPA » Thu Dec 03, 2015 6:20 pm

Let him buy his own stocks and learn that way.

My dad let me buy my own stocks, with my own money, and it was a great learning experience. I started when I was like 10. Nintendo and Wrigley gum. Needless to say, I did very poorly when I took over access at 18.

I lost and wanted to know why. I learned. Then I thought I knew it all when I graduated college with an accounting and finance degree. I traded options and made excellent returns. Smart, proven ability, and an access to a 0% balance transfer card to write checks to oneself... what could possibly go wrong. Buying OTM calls prior to earnings. Trust me... it's priced in.

Lost all the earnings. Lost the borrowed funds. To boot, I was making peanuts. Down, up, and back down, in violent fashion.

I now invest in index funds (partly to due restrictions by employers), employer stock up to a 5% network threshold, aggressively pay down mortgages, and keep learning.

Win or lose he'll come out on the right side. Having a conversation now opens the door for more later. My dad and I constantly talk investmentshow and others think it's not polite. It's our thing and we both enjoy it.

Now if I could just get him to give me back my money for the goat farm business he had me invest in at 11, I'd be all set. I think I'll wait and sort it out with the estate in 30+ years.

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Maynard F. Speer
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Re: Teaching investment theory to a child

Post by Maynard F. Speer » Thu Dec 03, 2015 6:20 pm

I'm not quite comfortable enough to invest in Apple myself, but I'd give him that there's a good argument Apple is still undervalued - PEG ratio and fundamentals look surprisingly good on paper

Same can't be said for the S&P 500 at the moment ... Kid could be the next Peter Lynch - world will always need good stock-pickers

As Taylor's 2015 Dalbar thread suggests, investor behaviour has a far greater sway on average returns than choice of funds .. When I was 12/13, I was in the habit of getting pocket money for chores or achievements; putting it in a bank account (good interest rates back then) and saving for toys - already questioning: why not just save until you can live off the interest? ... Self-discipline and delayed gratification are probably the best lessons you can learn at that age ... I'd probably get my kid saving his/her pocket money into P2P lending
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Re: Teaching investment theory to a child

Post by itstoomuch » Thu Dec 03, 2015 6:26 pm

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Re: Teaching investment theory to a child

Post by Nowizard » Thu Dec 03, 2015 6:40 pm

One suggested approach:
1. Money is needed to purchase items
2. Money must be earned
3. Sometimes, there is not enough money to purchase what you want, and you have to wait
4. Saving is the way you accumulate money to purchase items you want
5. The earlier you start saving, the better

There are, of course, many other items that relate to these steps that can be used. For example, the rule of 72, compound interest, interest in a general sense, patience, etc.

We put our children's names on our credit cards at about the age of 13, though they did not know it until later. Later, they had their own credit card (Late HS and college). The early history seems to have been very positive in terms of their FICO score since we pay off credit cards in full monthly. They actually had a mildly higher FICO score than we, his parents, immediately after college, about four points higher at 800+.

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Re: Teaching investment theory to a child

Post by MN Finance » Thu Dec 03, 2015 7:02 pm

You should be commended for starting him early. Really the greatest benefit of being a boglehead is that you're bound to teach your children some of the most important lessons of their life.

That said, it's probably a mistake, or maybe simply unfruitful to hope he learns anything from investing this way. If his picks do well, he'll have the wrong message. If they don't, he could shy away from investing in the future. There's really no win.

The most appropriate lessons are around personal finance (budgeting, savings, credit, income, etc) not on investing. For my kids we focus on savings and setting goals (delayed gratification). I provide them a guaranteed return on their money since the return aspect isn't important at this age. And since banks pay nothing, I give them 10% of their balances per year. Yes, that's high but it needs to be large enough to see a measurable increase in short period of time (a couple years.)

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Re: Teaching investment theory to a child

Post by knpstr » Thu Dec 03, 2015 7:10 pm

let him pick stocks!

Warren Buffett's greatest lesson was on the first stock he bought "Citi Services Preferred"

bought it, dropped and made him sick, sold to break-even and get out, went on to triple in value.

Learn the hard lessons "cheap".
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Re: Teaching investment theory to a child

Post by arcticpineapplecorp. » Thu Dec 03, 2015 7:31 pm

Dieharder wrote:Anyway, I opened an account with a discount broker and let him buy a few shares of AAPL. He is a firm believer AAPL has many products they are launching that will boost the share price. My obvious answer was that all of this is priced in and the more likely chance is that they will disappoint in earnings and then you lose, and you win only if they come out with a product that is really a breakthrough product.
I think you did the right thing like others said, he will learn a lesson either way (whether it makes or loses money) but do track it against a benchmark as others suggested.

One other thing I would mention is that when he said "I want to buy AAPL", did you say, "You can have AAPL as well as thousands of other companies too"? In other words, I think too many people look at investing as an "either/or" rather than an "and". He doesn't have to choose AAPL to the exclusion of thousands of other companies. If he owns the market, he can have AAPL in addition to those other companies (many of which he probably also loves).

The beauty of owning the market is when you're at a party and someone brags about the stocks they own, you can say matter of factly, "Oh I own those too".
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Re: Teaching investment theory to a child

Post by DVMResident » Thu Dec 03, 2015 7:51 pm

This website gives a nice guide as bench marks for children to learn about money:
http://moneyasyougrow.org/

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Re: Teaching investment theory to a child

Post by Elysium » Thu Dec 03, 2015 8:01 pm

arcticpineapplecorp. wrote: One other thing I would mention is that when he said "I want to buy AAPL", did you say, "You can have AAPL as well as thousands of other companies too"? In other words, I think too many people look at investing as an "either/or" rather than an "and". He doesn't have to choose AAPL to the exclusion of thousands of other companies. If he owns the market, he can have AAPL in addition to those other companies (many of which he probably also loves).
I did. I explained to him about the concept of market cap based allocation and then we sat down and looked at the holdings in S&P 500 index fund and he had several questions on the number of shares, P/E, and other numbers. Then we noticed that AAPL had a low multiple compared to some of the others and I mentioned that means it is selling cheaper relatively but then this is the correct price determined by the collective wisdom of the market and barring insider information you have no way to determine any new product launch will improve price. I gave him the the option to buy the whole basket that included Apple. But he wanted to try it, and his plan was something like if he makes a good profit he intends to pull out his original investment and keep it in the market or something safe then let the profits run.

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Re: Teaching investment theory to a child

Post by MN Finance » Thu Dec 03, 2015 8:04 pm

DVMResident wrote:This website gives a nice guide as bench marks for children to learn about money:
http://moneyasyougrow.org/
This is good. Notice how much is devoted to choosing investments and how they work. Ya, none. Almost every investor in the world focuses on the implementation, while most here know it's the last of many steps, not the first.

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Re: Teaching investment theory to a child

Post by Maynard F. Speer » Thu Dec 03, 2015 8:16 pm

Dieharder wrote:
arcticpineapplecorp. wrote: One other thing I would mention is that when he said "I want to buy AAPL", did you say, "You can have AAPL as well as thousands of other companies too"? In other words, I think too many people look at investing as an "either/or" rather than an "and". He doesn't have to choose AAPL to the exclusion of thousands of other companies. If he owns the market, he can have AAPL in addition to those other companies (many of which he probably also loves).
I did. I explained to him about the concept of market cap based allocation and then we sat down and looked at the holdings in S&P 500 index fund and he had several questions on the number of shares, P/E, and other numbers. Then we noticed that AAPL had a low multiple compared to some of the others and I mentioned that means it is selling cheaper relatively but then this is the correct price determined by the collective wisdom of the market and barring insider information you have no way to determine any new product launch will improve price. I gave him the the option to buy the whole basket that included Apple. But he wanted to try it, and his plan was something like if he makes a good profit he intends to pull out his original investment and keep it in the market or something safe then let the profits run.
You could consider teaching him something like the Darvas Box, or how to use moving averages and stop-losses to run winners and cut losers .. Good investors tend to have some works-more-often-than-not system in place (such as the way we use annual rebalancing or rebalance bands) to avoid emotional decision-making and cognitive biases

Kids could pick this stuff up in a snap - you should see the kind of stuff they figure out in games like Minecraft ... Good you've got him looking at fundamentals - already ahead of many investors out there
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: Teaching investment theory to a child

Post by Fallible » Thu Dec 03, 2015 9:59 pm

Dieharder wrote:
arcticpineapplecorp. wrote: One other thing I would mention is that when he said "I want to buy AAPL", did you say, "You can have AAPL as well as thousands of other companies too"? In other words, I think too many people look at investing as an "either/or" rather than an "and". He doesn't have to choose AAPL to the exclusion of thousands of other companies. If he owns the market, he can have AAPL in addition to those other companies (many of which he probably also loves).
I did. I explained to him about the concept of market cap based allocation and then we sat down and looked at the holdings in S&P 500 index fund and he had several questions on the number of shares, P/E, and other numbers. Then we noticed that AAPL had a low multiple compared to some of the others and I mentioned that means it is selling cheaper relatively but then this is the correct price determined by the collective wisdom of the market and barring insider information you have no way to determine any new product launch will improve price. I gave him the the option to buy the whole basket that included Apple. But he wanted to try it, and his plan was something like if he makes a good profit he intends to pull out his original investment and keep it in the market or something safe then let the profits run.
Just curious that he seems to know already some of what's out there and to be fairly positive about what he wants. Where is he learning this? Is he this positive about other subjects in school?
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Re: Teaching investment theory to a child

Post by itstoomuch » Thu Dec 03, 2015 10:11 pm

Dieharder wrote:
arcticpineapplecorp. wrote: One other thing I would mention is that when he said "I want to buy AAPL", did you say, "You can have AAPL as well as thousands of other companies too"? In other words, I think too many people look at investing as an "either/or" rather than an "and". He doesn't have to choose AAPL to the exclusion of thousands of other companies. If he owns the market, he can have AAPL in addition to those other companies (many of which he probably also loves).
I did. I explained to him about the concept of market cap based allocation and then we sat down and looked at the holdings in S&P 500 index fund and he had several questions on the number of shares, P/E, and other numbers. Then we noticed that AAPL had a low multiple compared to some of the others and I mentioned that means it is selling cheaper relatively but then this is the correct price determined by the collective wisdom of the market and barring insider information you have no way to determine any new product launch will improve price. I gave him the the option to buy the whole basket that included Apple. But he wanted to try it, and his plan was something like if he makes a good profit he intends to pull out his original investment and keep it in the market or something safe then let the profits run.
Late 1990's nephew bought 300 shares AAPL. He's still has the shares and financing his MD training. State U. He's still in residency @ 30
DS same age, we kept the UGMA in Indexes., MF, and EE. Private U. He's got a nice job, a house, and nice total account. Plays a lot, @30.
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Re: Teaching investment theory to a child

Post by jjface » Thu Dec 03, 2015 11:00 pm

Personally I think you'll get into trouble trying to teach investing at this age. There is no easy way to explain it and it isn't fun. Try to make it fun and you open up the possibility for even more issues. Focus on saving, living within your means, and matching their savings. Half of the 'game' is saving enough regularly. The investing part can wait.

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Re: Teaching investment theory to a child

Post by Elysium » Fri Dec 04, 2015 12:50 am

Fallible wrote: Just curious that he seems to know already some of what's out there and to be fairly positive about what he wants. Where is he learning this? Is he this positive about other subjects in school?
I am not sure whether he's not supposed to have some of these ideas, he's a straight 'A' student in school and has some interests in other subjects such as biology and health sciences. He has been looking at stock market prior to this on his own and started asking questions lately and talking about buying stocks, this is how I came up with the idea of letting him buy. He also talks all the time about becoming an inventor when he grows up, and do have some ideas that sound really good, especially on the topic of biology. We don't think too much about it other than curiosity and competitive nature, we just try not to let it take over his main focus at school. Once he goes to HS and College we figured he'll mature and know what he can truly do.

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Re: Teaching investment theory to a child

Post by nolapepper » Fri Dec 04, 2015 12:13 pm

I was trying to teach my son about investing and I heard about fake money and the google virtual invest account. However, I was not able to find it.

Anyone has a link to the site where you can create an account with fake money to invest?

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Re: Teaching investment theory to a child

Post by Maynard F. Speer » Fri Dec 04, 2015 12:20 pm

Whatever you do, they'll always hit that rebellious age around 15

It might be long-only tech stocks now, but in a few years time he'll be 8x long USD vs EUR with forwards on the Hang Seng
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Re: Teaching investment theory to a child

Post by Fallible » Fri Dec 04, 2015 12:35 pm

Dieharder wrote:
Fallible wrote: Just curious that he seems to know already some of what's out there and to be fairly positive about what he wants. Where is he learning this? Is he this positive about other subjects in school?
I am not sure whether he's not supposed to have some of these ideas, he's a straight 'A' student in school and has some interests in other subjects such as biology and health sciences. He has been looking at stock market prior to this on his own and started asking questions lately and talking about buying stocks, this is how I came up with the idea of letting him buy. He also talks all the time about becoming an inventor when he grows up, and do have some ideas that sound really good, especially on the topic of biology. We don't think too much about it other than curiosity and competitive nature, we just try not to let it take over his main focus at school. Once he goes to HS and College we figured he'll mature and know what he can truly do.
If he's interested in becoming a good investor, especially versus a speculator, that's great and the more he can learn from you now will help set him on the right path.
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Re: Teaching investment theory to a child

Post by Elysium » Fri Dec 04, 2015 12:48 pm

Fallible wrote: If he's interested in becoming a good investor, especially versus a speculator, that's great and the more he can learn from you now will help set him on the right path.
He wants to be an inventor not an investor when he grows up, that is what he says mostly and he works on some ideas in the health sciences field, some of which has surprised me. For instance he had an idea about making blood sampling process simpler and he made some basic design then later on I found that there was a company called Theranos founded by a young women that has a similar product and he just dodn't know anything about it. His room is full of pictures and drawings on anatomy and biology, he doesn't like to be a Physician though, that he has strong dislike for, but says his preference is on research and invention. We don't think too much about it except excitement at that age about something. So long as it is all healthy we think it is fine.

As for finance I just want enough basics understood with money, hopefully good knowledge, by the time he gets to College. I don't think much beyond that because I know he is not like me in personality, he is more of risk taker and thinking of these big projects all the time. I just hope he gets a good education after which he can do anything he wants and even if his ideas don't pan out, he can get a decent job and have some basic understanding of finance.
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Re: Teaching investment theory to a child

Post by Fallible » Fri Dec 04, 2015 1:00 pm

Dieharder wrote:
Fallible wrote: If he's interested in becoming a good investor, especially versus a speculator, that's great and the more he can learn from you now will help set him on the right path.
He wants to be an inventor not an investor when he grows up, that is what he says mostly and he works on some ideas in the health sciences field some of which has surprised me. For instance he had an idea about making blood sampling process simpler and he made some basic design then later on I found that there was a company called Theranos founded by a young women that has a similar product and he just dodn't know anything about it. As for finance I just want enough basics understood with money whether good or bad by the time he gets to College. I don't think much beyond that because I know he is not like me in personality, he is more of risk taker and thinking of these big projects all the time. I just hope he gets a good education after which he can do anything he wants and even if his ideas don't pan out, he can get a decent job and have some basic understanding of finance.
Oops, sorry I read "inventor" as 'investor,' although I guess it's an understandable slip. I think his having so many ideas and interests at this age is great and I would guess his teachers do also. Good luck to you both!
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Re: Teaching investment theory to a child

Post by Elysium » Fri Dec 04, 2015 1:05 pm

Fallible wrote:
Dieharder wrote:
Fallible wrote: If he's interested in becoming a good investor, especially versus a speculator, that's great and the more he can learn from you now will help set him on the right path.
He wants to be an inventor not an investor when he grows up, that is what he says mostly and he works on some ideas in the health sciences field some of which has surprised me. For instance he had an idea about making blood sampling process simpler and he made some basic design then later on I found that there was a company called Theranos founded by a young women that has a similar product and he just dodn't know anything about it. As for finance I just want enough basics understood with money whether good or bad by the time he gets to College. I don't think much beyond that because I know he is not like me in personality, he is more of risk taker and thinking of these big projects all the time. I just hope he gets a good education after which he can do anything he wants and even if his ideas don't pan out, he can get a decent job and have some basic understanding of finance.
Oops, sorry I read "inventor" as 'investor,' although I guess it's an understandable slip. I think his having so many ideas and interests at this age is great and I would guess his teachers do also. Good luck to you both!
We are in a very competitive school district, and he goes to a middle school which is probably one of the best in the country where kids like him are more of a norm than the exception, so while he is doing well he is not by any stretch of imagination the exception. Sometimes it is scary for us how competitive it has become at our school district.

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Re: Teaching investment theory to a child

Post by wander » Fri Dec 04, 2015 3:40 pm

Dieharder wrote: What would you have done? let him try and learn from a mistake and consider this as tution fee, or continue to advice passive investment and set one up even though he doesn't care much about low returns (in his view).
I would let him play with that small amount. You can cover his tuition fee later.

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