Ari Black: Next Gen–Start Investing Early

Opening an account for Minors

Get a job! Or earn allowance money using the Mydoh app. Parents sign up and, add up to five kids. From the parent account they load money, then work with their children to setup tasks, allowances, savings goals, and other activities that help their kids learn to manage their own money.

Kids 0-12 can open a free bank account called RBC Leo's Young Savers Account.

Anyone over 14 can open a RBC Direct Investing Practice Account. Its a free clients and provides you with $100,000 of "practice money" to invest in stocks or options.

Anyone over 16 can open a DS Investment account (with parent signatory).  Alternatively, your parents can hold stocks for you in their account or an in-trust account can be opened.

Suggested Books

Major themes in these books are compounding investment returns, dollar cost averaging and paying yourself first - and how to outsmart the market with your stock picks.

My All time favourites

• Beating the Street (Peter Lynch)
• The Wealth Barber (David Chilton)
• The Psychology of Money (Morgan Housel)
• The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Howard Marks)
• Thinking Fast and Slow (Daniel Kahneman)

Age appropriate suggestions

• Kids 10+: From Piggy Banks to Stocks, The Ultimate Guide for a Young Investor (Maya Corbic - a Canadian CPA)
• 13-16: A Rich Future: Essential Financial Concepts for Youth (by Noah Booth - teen from Kingston, ON)
• 16+: Seventeen to Millionaire (Douglas Price)

Test Your Knowledge

See answers at the bottom.

1) Which is the cheaper company? Stock A at $100 or Stock B at $1,000?  

2) If you want to become a millionaire, how much would you need to invest each month until you retire in 50 years? 
    (Assume an annual return of 8.7% which is the 50-year average of the S&P 500)

i) $100/mo., ii) $500/mo. or iii) $1,666/mo.

3) If you earn an extra 2% per year on your investment (for example, earning 8% instead of 6%), how much more would your investment be worth after 40 years?

i) 50%, ii) 80%, iii) 100% or iv) 110%

4) Assume you buy a house for $1,000,000 (or a parking space!) with a loan for $750,000.  If the price of the house drops by 10%, what percent did your investment decline?

5) What is the biggest single-day gain in the S&P 500 history? Largest decline?

6) Since 1975, what has been the worst performance of the S&P 500 over a 5, 10, 15, and 20 year holding period?

7) What has been the better investment since its first day of trading in 1972: Coke or Pepsi?

Answers

1. Trick question. Price does not matter in isolation! To determine the size of the company you need to know the total number of shares owned by others and how much debt.  Value is then determined by how much are earnings growing and how much risk is there to future growth.

2. The correct answer is $100 per month.  This is the power of compounding and being focused on long term returns. You would only need to contribute $60,000 total ($100 x 12 months x 50 years) to grow a portfolio to $1,000,000. Invest as much as you can when you are young.

3. 110%.  Maximizing your return has a large impact over time. Don't settle for mediocre returns or pay fees that can't be justified by better results.

4. Down 40%.  The house price declined by $100,000 which means that your investment (or your equity) declined from $250,000 to $150,000.  This is the risk (and often a benefit) of using debt/leverage on your investments.

5. The largest one day gain is 9.29% (Mar 13, 2020) and the largest one day drop is 20.47% (Oct 19, 1987).  Typically the largest daily declines are larger than gains, but fortunately there are much more up days than down.

6. Stocks don't always work out but your odds improve with longer time horizons. Over the past 50 years the worst:

• 5 year return was -40% (Mar 2004 to 2009)
• 10 year return was -47% (Mar 1999 to 2009)
• 15 year return was +10% (Aug 1967 to 1982)
• 20 year return was +50% (Mar 2000 to 2020)

*Additionally, if the market is already down 10% or more from its highs, your odds improve drastically. 

7. Pepsi has been a superior investment since its IPO in 1972 (and across most time horizons). Coca Cola holds a significantly larger market share (42% vs. 31%), but the effectiveness of the management team and the cost of acquisitions often have as much impact as the brand itself.

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