Kids Investing—Your First Bear Market

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Financial Lessons and Investing Basics for Kids

We began this Stockpile investing adventure six months ago, and at that time it would have been difficult to foresee the sort of volatility these budding portfolios would experience. Two months back, in February 2020, with the market at all-time highs, my kids were each up 30%. A crazy return for an account that was just four-months old at the time. Extrapolate that return out and by age eighteen their initial $5,000 investment would be worth about $13,000,000.

What? Not realistic?

Okay, I didn't think so either, and I decided it probably wasn't best to share that $13M figure with my kids. Imagine trying to motivate a child to do anything if they were certain that upon turning eighteen they could buy an island?

Instead we focused on discussing how the market goes through cycles. Up and down, up and down, but always over the long-term more up than down. This is a simple, but important lesson for kids to learn about the stock market.

A monthly chart of the Dow Jones Industrial Average going back to around the time of the Black Monday 1987 crash. A big deal at the time, but hardly even a blip 33 years later.

In the Time of Corona

So, my kids' portfolios were rocking, up 30% in four months and millions of dollars within reach. What could go wrong?

[the coronavirus, a.k.a. Covid-19, enters stage left]

In just a few short weeks the stock market would enter a bear market, ultimately dropping nearly 40% before bottoming out (at least for now).

Unprecedented and unforseen? Well... sort of. Leading up to the emergence of the coronavirus—and the worldwide lockdown and subsequent economic collapse—the market had been eleven years deep into a bull market. Bull markets simply don't last that long. The market was due for a bear market. And while the coronavirus was a surprise, bear markets always have some catalyst that kicks them off, and the virus was that catalyst.

This is the point where I had to separate myself a bit from the management of their portfolio. I'm a trader, and when I see things like this happening I get out of the way. I went from 85% invested on Feb 20th, to 0% on Feb 24th, completely avoiding the portfolio disaster that lie ahead. But my kids' portfolios are on a time horizon of decades. I'm not going to actively manage them day in and day out the way I do my own trading portfolio. It's not feasible. So we just sat back and let the market do its thing. Down we go, riding what, in ten or twenty years will likely be just another blip on the long-term Dow Jones Industrial Average chart.

So how do you trade a bear market then?

Well, if your time frame is a decade or more the answer is easy—you buy more stocks.

We hadn't made their 2020 deposits yet, fortunately, so at the beginning of April we transferred in 2020 deposits and sat down to pick some more stocks.

Bear Market Buying

We had already pretty well exhausted the names of companies they were familiar with and happy about owning, so I suggested some new ones that they know about but wouldn't have necessarily thought of on their own.

me: You guys know how the virus has stopped us, and everyone else, from going anywhere? Nobody is taking a vacation. Nobody can fly anywhere for work. The airports are empty right now. But what do you think will happen when the virus is over with and we can all move around again?

We had a good discussion about the airlines and how important they are. I was even able to weave in a bit about government bailouts, and how I felt pretty certain that if the government wanted America to be able to "get back to work" when this was all over, they were going to need fully functioning airlines. Good or bad, right or wrong, the fact is that the airlines are going to get a ton of government bailout help. Will they all survive? I don't know. Maybe not. But the big names stand a pretty fair chance of coming out the other end of this tunnel. I showed them charts of the airlines.

me: So, what do you think about buying United?

8yo son who is also a very experienced traveler: Boooooo.

me: You don't like United?

8yo son: They never have tv's on the seats!

me: Ahhh, that's not United, you're talking about American. Yeah, I hate them, too.

10yo daughter: We like that one that has all the movies and games on each seat and gives us juice and those cookie bars.

me: Delta! Okay, we can buy Delta.

With that settled we picked up a few hundred dollars worth of Delta at $22 a share. The stock has spent the past couple years trading around $60. Will it go back to $60? Who knows? Probably not right away. Probably not for quite a long time, in fact. But again, this is the beauty of starting kids' investing lives early. Time heals most wounds.

Building the Portfolio

We talked about a few other stocks and eventually settled on buying Starbucks and Tesla. Are these great trades right here? I don't know, maybe, maybe not. Will it matter ten years from now if they bought the low? Probably not. The important thing right now is that they are investing and learning. The portfolio, time, and market history, will take care of the rest.

We deployed about 30% of their 2020 money so far, and will buy more as the weeks go by. I won't worry too much about where the market is at the time. It might be higher, it might be lower. Odds are good that it will be lower than where it was when they made their 2019 purchases, which seems sort of depressing. But if your timelines is like theirs then bear markets rule. Why? Because they always come back. By the time my kids are dipping into these funds the market will certainly be higher than it is now.

Below is their current portfolio. As I write this their accounts are down just .3% while the Dow is down 8%. Nothing too exciting. But hey, who ever said investing should be exciting? Our current investing process is to invest $5,000 per year, and buy around $500 (it's been anywhere from $450 to $650) worth of each stock. By the end of 2020 that should put them in a pretty wide ranging portfolio of around 15-20 stocks. Along the way we'll likely add some shares of our favorites, and over time will probably add some new ones that we discover as well, but for the most part a 20 stock portfolio should serve them well for their first few years.

An 8 year-old's portfolio. Plenty of 10, 20, 30-year growth potential there.

The next few months will likely prove to be wild times for traders like me, and should provide many useful lessons for my kids. Along with learning to read, and the ins-and-outs of long division, they'll learn about bear markets, and unemployment rates, and gross domestic product, and trade deficits, and supply and demand! These are things that I love knowing about. They make my understanding of the wider world more well-rounded. None of these things were taught to me before college. How much easier would my grasp of these concepts have been if they had been taught gradually to me from the time I was still scraping my knees in skateboard crashes? That's my goal. Not to make my kids rich, but to prepare them for making themselves financially secure.