Investing 101 for Your Kids
By Luma Wealth on April 7, 2020
Helping Kids Develop Healthy Financial Habits: A Lesson About Asset Allocation
Your kids are home from school, listening to the news and possibly overhearing your conversations about a volatile stock market. Older children may have questions or concerns. Since April is Financial Literacy Month, now is an opportune time to introduce them to some key concepts of investing.
At Luma Wealth, we believe in taking a long-term, diversified approach to investing and aligning each client’s asset allocation with their financial situation, time horizon and goals. We begin by providing answers to questions your children may have about asset allocation.
Question 1: What is asset allocation?
Asset allocation is the mix of equities, fixed income, cash equivalents and alternative investments in your investment portfolio. These are the four broad asset class categories, collections of investments that behave similarly under different market conditions.
Question 2: How much of my money should go into each type of asset class?
The portfolio that’s right for you will have an expected level of risk and return that is aligned with your situation and risk profile. In general, younger people have a longer time horizon before they need their investment dollars, so a more aggressively invested portfolio containing a higher concentration of equities and alternative investments may be more appropriate. Historically, this type of investment portfolio has yielded greater growth over time, although it can often be more volatile, going up and down in value.
Question 3: I’m hearing that the market’s going down – is it a bad time to invest?
No one can predict the future and these are certainly unprecedented times. However, we can look to the past for guidance. Historical data shows that timing the market, which means trying to guess the market highs and lows, doesn’t work well for most investors as a strategy. What has proven more effective is staying disciplined and sticking with a well-diversified investment portfolio, so you don’t miss out on the best performing days.
Question 4: I’m just starting out and I don’t have a lot of money to invest. How can I create a diversified portfolio?
It’s never too early to start thinking about investing toward your future. If you have money to invest, you may want to consider opening a Roth IRA to begin saving for retirement. You can invest using Mutual Funds and Exchange Traded Funds (ETFs), which are professionally managed pools of securities that offer investors convenient diversification.
For more information, you can visit the U.S. Securities and Exchange Commission’s Beginners’ Guide to Asset Allocation, Diversification and Rebalancing, or contact your Luma Wealth advisor.
At Luma Wealth, our goal is to empower you to raise confident investors. Please reach out to your Luma Wealth advisor for guidance on opening an investment account for your child. And follow us on LinkedIn, Facebook, and Twitter to access more of our thought leadership.