Five Investing Rules You Can Learn From Kids


A couple of weeks ago, I wrote about what you can learn from the opposite sex when it comes to investing. As with most things, men and women have different strengths when managing a portfolio.

This week, I'm taking it a step further: I'm going to show you what you can learn from your kids. Yes, your kids. Or your nieces and nephews, if you don't have kids of your own.

Children have an interesting perspective about investing: They can really bring you back down to earth and help you recover common sense (because, let's face it, money -- and, specifically, the prospect of making more money -- really makes us kind of lose it, a little bit).

So, here are five lessons you can take from the little ones in your life:

1. Buy Low. Logically, you know this rule. You'd never wait for the price of those shoes to go up. But for whatever reason, people tend to lose sight of this when investing.

"If you go back to March of 2009, stocks had a half-price sale, and kids will tell you that it's better buy something when it's on sale, when prices are low rather than high," says Allan Roth, a certified financial planner and author of How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn. "But we were panicking in the streets, selling. Now that the markets have recovered, finally many people have started moving back into the stock market."

Ideally, of course, you want to do the opposite: Buy low, and sell high.

2. Diversify.
Your kids probably know the saying as well as you do: Don't put all your eggs in one basket. For them, it might apply more to the mall than the stock market, but the key lesson remains the same. If you aren't spreading your investments out, or worse, your portfolio is too heavy in your employer's stock, you're asking for trouble.

Many people don't think about it this way, but your job is, essentially, one of your investments, and certainly the one with the highest return. If your company goes down -- and history shows us that's always a possibility -- you don't want the lion's share of your investments to go with it. Keep company stock to 5% or 10% of your portfolio, at the most.

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3. Lend With Caution. Or as a kid would say, don't lend money to someone who won't pay it back. This rule has two meanings, at least to me: First of all, keep your risk in check. Yes, you have to weigh your individual tolerance for risk, and some people like taking chances. That's fine, but don't let greed get in the way of common sense.

The second way this factors into your portfolio? Don't tie your money up in low-yield investments that won't beat inflation. If you do that, you're losing money. Instead, set yourself up with an emergency fund (here, the interest rate is less important than easy access) and then set up a portfolio that will beat inflation. That means an age-appropriate mix of stocks and bonds.

4. Don't Play the Game Unless You Understand the Rules. "We adults sign up for an annuity with a 373-page prospectus, not realizing that the actuaries and the attorneys aren't writing that thing to protect the consumer. I've never met a consumer who understood what they bought, and I've rarely met an agent who understood what they were selling," says Roth. This goes for all investments you don't understand: Ask questions, and if it still isn't clear, move on.

5. Keep It Simple. An overly complex portfolio isn't necessarily a better portfolio -- and in fact, in many cases, it's worse. Yes, you want to diversify, but you can do that with three to five funds, says Roth: A total U.S. index fund, a total international index fund and a total bond index fund. "With those funds, you can own the entire world. People think they have to have 53 mutual funds, but that doesn't mean they're diversified."