Let’s face it: As parents we know we have learned lots of important lessons, and we wish our kids would pay attention when we try to impart those lessons. And let’s face it: Our kids usually hear what they want to hear and ignore what they want to ignore. (Most of us did the same thing when we were young, but let’s keep that just between us for now.)

Occasionally we parents have a window of opportunity when, for reasons that are sometimes hard to fathom, our kids are in a receptive mood and actually pay attention. When we can, I think we should take full advantage of those opportunities to teach the things that are likely to make a big difference.

Basic lessons for younger children include the concept of saving and the notion (even some grownups never seem to get this right) that you can only spend a single dollar once, so you should choose carefully.

For purposes of this article, I’ll focus on how to instill good investing habits and attitudes in young people who are just getting started with careers and savings. Here are nine lessons I’d love to see them learn.

First: Start saving now. Even if all you have is $50, start. Many potential fortunes have been lost because people waited. Time is the biggest asset that young people have. Time to add to their savings. Time to let those savings grow and compound. A 1,000-mile journey starts with a single step, as you’ve probably heard more times than you can count. One reason you’ve heard it over and over is that this is one of the ways the world really works.
 
Second: Don’t scoff at taking free money. It sounds pretty obvious, but thousands of your peers will do it this year when they decline to invest in 401(k) and similar retirement plans that offer matching funds. Sign up for payroll deductions as soon as you can and learn to get along without that money. If your account grows at 10 percent a year over a working lifetime of 40 years, $1,000 in matching contributions that you might get that first year could grow to be worth more than $45,000. This is free money. If you “earn” it by saving $1,000 of your own money, you have effectively turned every dollar of your own savings into $90 in the future. This should be a no-brainer.  Just make sure that company match is staying clear of company stock.

Third: You don’t have to be an investment wizard to win. Many of your peers will lose huge amounts of money over the years by trying to beat the stock market. Some will lose their shirts and never recover from their attempts to outsmart the market. Don’t follow their lead. Accept the returns of the market that you can get by investing in cheap index funds. If you start early and keep saving regularly, you are likely to wind up eventually having more money than you need. This will eventually open greater opportunities than you can easily imagine when you’re in your 20s.  
 
Fourth: Don’t run away from bear markets. (Actually, it’s a bad strategy to run away from a real bear, too!) When you’re young, a bear market can be your friend, because it lets you buy assets at lower prices. Another way you can remember this is an old investing formula that everybody pays lip service to but relatively few people actually practice: Buy low and sell high. The only way to buy at low prices is to buy when a preponderance of other investors want to sell. To do this, you have to have long-term faith in the markets; if you have that faith, then welcome the bear. If you don’t have enough faith to be a long-term investor, are you willing to rely on pure luck to be able to afford to retire eventually?

Fifth: This is a derivative of my third point above: Don’t get suckered into taking lots of risk. You’ll be told you can afford to take big risks in order to strike the mother lode. “After all, if it doesn’t work out you have plenty of time to make it back,” they will say. This is terrible advice. Think of that dollar you are saving from your paycheck in your first year, the one that may be worth $90 when your working days are over. You may think you are risking only that $1, but in fact you are inviting the loss of $90. Trust me on this point: When you are older you will wish you hadn’t done that.

Sixth: This is another derivative of my third point above: Don’t load up your investments on what has been hot lately. Many of your peers will do this, but it’s not any smarter than showing off by driving 95 miles per hour on the freeway when you think the troopers are somewhere else. Almost all investors get hooked by the lure of stocks in which everybody else seems to be making tons of money. Young people are particularly vulnerable to this unless they have lived through a bubble and seen the very real pain after a bubble bursts. Take it from somebody who’s been intently studying investments for more than 40 years: Nothing stays hot forever; and when it cools off, you will have little or no warning before it gets cold in a hurry.

Seventh: OK, you’re going to think this point is terminally boring, the kind of predictable talk you’d hear from old people who aren’t in touch with modern life. Don’t put all your eggs in one basket. I’m giving you this advice precisely because I’m very much in touch with real life. Too many people think they can outsmart the market (just as many drivers think they can outsmart the troopers on the highway). They think they understand investing. The problem is that every time they act as if they really understand investing, they are actually proving the opposite. Let me put it simply: When it comes to putting together a portfolio, concentration represents overconfidence at best, ignorance at worst. Diversification represents wisdom.

Eighth: Pay attention to time. I’m talking about the amount of time until you expect to need the money you are saving. If you’re saving for retirement decades in the future, you can afford to take the risk of investing in the stock market – and you should do so. But if you are saving up for a car or a vacation or a down payment on a home, you shouldn’t put that money at risk in hopes of making it grow fast. It might grow fast, but it might also disappear, leaving you with a lot more frustration than you will want. Most experts would agree that savings you expect to need within five years should not be exposed to the risk of stocks. Put that money in CDs, money-market funds, Treasury bills or short-term bond funds instead.  
 
Ninth: Don’t pay for what you don’t need and what might actually hurt you. Seems obvious, right? But you’d be surprised by how many of your peers will squander part of their savings by paying commission-based advisors at firms like Merrill Lynch and Ameriprise. They’ll be three-way losers. First, they could be buying into commission based products that might not be right for them, or that they do not understand with confusing names such as Fixed Index Annuities. Second, they will often be buying advice on how to do the wrong thing, like trying to beat the market. As young investors probably without a lot of money, they will most likely be in the hands of young, inexperienced advisors who are just learning the ropes. Do you really want to pay a greenhorn advisor to get an education at your expense? Third, your peers will give up forever the future earning power of every dollar they pay in commissions. Remember once again that $1 from your paycheck that you hope will become $90 when it’s time to retire.  

OK, parents: You may not be able to get your kids to learn and live those lessons. But it’s still well worth your efforts, and here’s why: Even if our kids and grandkids learned only a few of these nine lessons, they would be much less likely to need to come knocking on our doors for handouts. And we’d be more likely to watch them prosper than to struggle. That has to be worth our time and trouble.


Paul Merriman is founder of Merriman.