Sept. 10, 2021
The ideal time to jump into investing is after a huge stock market decline like we saw in March 2020.
Lots of investors have done that and they’ve made out exceptionally well. Kudos all around. Since then, we’ve had second and third waves of investors looking at stocks for themselves or for their children and grandchildren. Recently, a reader asked about getting his 13-year-old grandson into investing. “How can we set up an account that I would manage and that we agreed on together?” this grandfather asked.
Parents and grandparents of the nation are doing a good thing in helping make young people familiar with the stock market. Young adults moving into the work force today and in the future will need to rely more on stocks to reach their financial goals than previous generations. The rise of gig work, declining pension coverage in permanent jobs and low interest rates are a few reasons why this is so.
But now is a delicate time to get into investing if your motivation is capturing some more of the phenomenal gains we’ve seen since the 2020 crash. We are way closer to the peak of the current cycle than the bottom. Economic disappointments caused by a lacklustre recovery from the pandemic could hurt stocks badly.
So if you’re getting a young person into stocks right now, temper their expectations. Highlight the ups and downs of investing in stocks, and how they produce strong average annual gains over the long term. It’s tough to do, but discourage day-to-day score keeping. Explain that when stocks fall, and they absolutely will at some point, declines could be painful. The right response is to add more money to a well-built portfolio, not flee.
Children who have not reached the age of majority in their province (18 or 19) cannot open an investing account themselves. One alternative is to set up an informal trust, which some investment firms refer to simply as in-trust accounts. A quick tax primer: Dividends and interest would be taxed in the hands of the parent or grandparent, while taxes on capital gains are payable by the child. If contributions to the account are made with money from the child’s part-time job earnings or from the Canada Child Benefit, then all income is taxed in the child’s hands.
Another way to get kids into stocks is much simpler, even if it circumvents rules designed to prevent minors from getting in over their heads with investing. Open an account at a brokerage and either trade on behalf of a child or allow them access. I have heard of multiple cases in recent months of parents doing this and, once their kids have proven themselves, allowed them to manage the account.
A better way: Team up with your kids and grandkids and discuss trades before making them. It’s great to have aced the past 18 months as an investor, but let’s get real. We’ve seen a rising tide that has floated almost all boats. In a more normal investing environment, it’s going to be harder for investors of all ages.
This Globe and Mail article was legally licensed by AdvisorStream.