The Wall Street Journal had an article last week detailing Fidelity Investments’ push to get teenagers involved in trading and investing.[i] The Boston-based asset manager was once known for its rock star stock pickers like Peter Lynch decades ago, but Fidelity fell behind the curve in the early 2000s when exchange-traded funds (ETFs) became a mainstay in investors’ accounts, replacing expensive mutual funds.
Fidelity’s Push
Recently, Fidelity picked up the slack to offer more ETFs and a wider suite of low-cost index funds. They now compete well with other brokerage firms like Vanguard, Schwab, and TD Ameritrade. Fidelity has even attempted to grow its cryptocurrency offering. Maybe they are over-stretching. After all, there are benefits to keeping it simple.
But this latest headline suggesting Fidelity wants to get young ‘investors’ exposed to the market is interesting as it follows the “Meme Stock Mania” we all heard about back in January when shares of GameStop and AMC went to the moon (and back down again). The surge in “get rich quick” trading interest got some risk-seeking teenagers hooked. Fidelity’s new policy of letting teens trade by themselves eggs young people on to day-trade more, which is not ideal.
The 2020 Effect
2020 is a year we’ll all never forget for reasons beyond finance, but it will no doubt mark a new era for investors. So many factors were at play to drive fervent speculation – from all of that government stimulus money to free trading & free apps. The social media factor and the “FOMO” effect were real, too!
Shifting the Focus
Getting young people involved in the market and investing is a good thing. Yes, there are risks that it will be an avenue for them to gamble away college savings, but it will also likely get them to be long-term investors much earlier than past generations. After all, when did you realize the importance of contributing to your 401(k), IRA, and Health Savings Account?
We still believe that your son or daughter should not open one of these trading accounts with hopes of making a big score. Sitting down with us to prioritize your financial goals is the responsible thing to do. A savvy move is to open a 529 account to fund your child’s education or to get him or her started in a Roth IRA.
How about a Roth IRA?
A teenager might benefit more from a Roth IRA since it will set them on the right course for future savings. A 529 account is good for very young kids since there is more time for the account to compound before college bills come due.
Consider this – a $3,000 Roth IRA contribution today could be worth (ballpark it) $100,000 by the time your child retires in his or her late 60s. The rules for a “Roth IRA for kids” are straightforward – the parent opens a custodial account in the child’s name and the child must have employment income.[ii] Qualifying income can come from a regular part-time job or even self-employment income like babysitting money or from shoveling snow. The contribution limit is the lesser of how much income the child earned in a year or the $6,000 limit for 2021.
Making Bank – Over the Decades
The potential account balance by investing $3,000 per year and increasing the annual contribution by 3% per year until retirement at age 70 is astounding for someone starting at age 16 (blue line). Compare that in the chart below to someone starting 20 years later at age 36 (orange) and then to someone late to the game who begins saving for retirement at age 56 (gray). The chart below assumes a 7% return per year.
The Point
Encouraging teenagers to whip out their phones and start day-trading during high school English class is not wise. That is a risk of Fidelity’s latest initiative, but there are positive aspects we can draw from it. Teaching teenagers about investing (and pushing for financial literacy in general) is wise. Let’s work on shifting the focus from making bank on the stock de jour and towards the power of long-term wealth building. Let’s start ‘em young on the journey to financial freedom!
We’ll talk soon!
[i] https://www.wsj.com/articles/fidelitys-pitch-to-americas-teens-no-fee-brokerage-accounts-11621310461
[ii] https://www.irs.gov/retirement-plans/roth-iras
Retirement savings factors are hypothetical illustrations, do not reflect actual investment results or actual lifetime income, and are not guarantees of future results. Targets do not take into consideration the specific situation of any particular user, the composition of any particular account, or any particular investment or investment strategy. Individual users may need to save more or less than the savings target displayed depending on their inputs retirement age, life expectancy, market conditions, desired retirement lifestyle, and other factors.