If we could teach young people just one thing to improve their chances of financial success, it would be the concept of compounding. Only when your investment gains begin to earn investment gains of their own are you truly on the path to building meaningful wealth.
Yet this message isn't getting through. In the most recent global study of financial literacy, the U.S. ranked just 14th in the world when it comes to understanding basic concepts such as diversification and compounding. That was reported by S&P Global, the World Bank and Gallup in 2015.
This shouldn't come as a shock, as two-thirds of parents say they are reluctant to talk to their young people about money, according to recent polls. But there is a simple way to jump start this conversation: Give your children or grandchildren the gift of an investment.
We're not talking about old-fashioned savings bonds, which young people have been getting from grandparents for generations and that currently pay just 0.10% in annual interest. These days, parents can just as easily gift shares of companies their children can appreciate, such as Apple, Netflix or Nike. Or better still, gift them shares of a mutual fund that offers exposure to the broad market.
Part of the benefit is simple: We need to boost young investors' overall exposure to equities. A survey conducted by Gallup last year found that only 37% of young adults (those younger than 35) owned stocks in 2017 and 2018, down from 52% before the 2008 market crash. Apparently, the effects of the global financial crisis and recent stock market volatility linger in their psyche.
Yet if a millennial owned shares of a broadly diversified equity fund back then, they would have witnessed several important things:
It just goes to show how valuable an investment gift can be. While savings bonds may seem quaint today, they played an essential role in rebuilding the confidence and finances for families who lost wealth and faith in the aftermath of the Great Depression. In the aftermath of the global financial panic and Great Recession a decade ago, an investment gift in stocks or a fund can teach real lessons in why it pays to invest early and stay invested.
— By Mark Stoeckle, CEO of Adams Funds