Q: I have a 14-year-old daughter who has started showing interest in investing. I'd like to give her a sound foundation and some hands-on experience, but I don't have much spare money. Do you have any suggestions?
A: In the past, I've written about giving children stocks or savings bonds. Savings bonds can be bought for as little as $25 and teach a good lesson about the risk-free compounding of interest. But giving stocks is a lot more cumbersome and costly.
So, I've invented a game I call the Play and Earn money game, and here is how it works:
You give each child a certificate for $200 (or any amount you want). You don't give REAL money, just a homemade certificate announcing the child has a play credit for the money.
The child then invests any or all of this money in stock. The best choices are stocks of companies with which the youngster is familiar, such as Coca-Cola, PepsiCo Inc., Reebok International, Nike Inc., Walt Disney Co., Apple Computer or any telephone company stock.
Before you start to play, agree on a final goal for each child. That RTC goal may be $225, $250 or even $300. Note: This final amount can be important, because although the original certificate is play money, the difference between the certificate amount and the final goal may be paid out in real money.
After the stocks are selected, give your children individual notebooks or accountant's spreadsheets, and have them write the name of the company, number of shares (one per company is best because it allows for a larger list and easier bookkeeping), and the most recent price.
They can find those prices in the local newspaper, the Wall Street Journal or Barron's, or you may want to call a broker for them.
From then on, at least once a week, the children should look up and update the market price of each stock and the aggregate "portfolio" value.
The objective of this game is to have fun while learning. So, here are some rules that should enhance both these objectives:
* The child always has the option to sell or hold. If there is "uninvested cash" in the "account," he or she can buy additional shares.
* The game ends when the portfolio value reaches zero (this is very hard to do), the child decides to cash out by selling all the holdings, or the portfolio reaches the pre-agreed final value. Any amount over $200 can then be paid to the child as "earnings" or "profit."
If the portfolio value goes below $200, the game goes on, but you haven't lost any real money. If the portfolio value goes up above $200, the child has four choices:
* Continue to hold and watch.
* Sell the winners and reinvest in other stocks.
* Sell and put the proceeds into a savings account or savings bond.
* Sell the winners and spend the profits on anything he or she wants.
Your risks as the "banker" are minimal, but the rewards are many.
If the stocks go down, the child learns about risk. If he or she sells to cut losses, that's the most valuable lesson of all. If the portfolio goes to zero, you can start all over again -- this time with priceless experience.
If the portfolio appreciates and your child decides to cash in the winners, you are out a few dollars. But your child has learned to "book" (take) the gains, perhaps the second most valuable lesson.
Even though this is a paper game, the prospects of real profits can be an important incentive for your child to play.
A new Merrill Lynch Financial Literacy Test indicates that adults across the nation have a shockingly low level of knowledge about basic economic facts and concepts.
Eighty-two percent of those polled were unable to correctly answer questions about elementary topics including information readily available on either a daily, weekly or monthly basis.
Many couldn't identify the current level of the Dow Jones Industrial Average, which is the most widely reported financial statistic in America, or name the current chairman of the Federal Reserve, one of the nation's most powerful economic policy-makers.
I thought it would be fun for you to try your hand, so here is the 10-question test. Now, before peeping at the answers, write your own down. I did, and at the end of this column, I'll tell you how I did -- honestly.
1) What is the current level of the Dow Jones Industrial Average?
2) What is the current national unemployment rate?
3) What is the current annual rate of inflation?
4) What is the highest federal income-tax bracket today?
L 5) What is the 30-year conventional mortgage rate right now?
6) What was the size of last year's federal budget deficit?
7) Over the last 20 years, which of the following investments would have offered you the best return on your money? Stocks, bonds, savings accounts, or certificates of deposit.
8) If you deposited $1,000 in an account and earned 8 percent compounded annually over 30 years, at the end of this period, would you have more or less than $5,000?
9) What is the largest annual Social Security benefit that a two-person household can receive today?
10) Who is the current chairman of the Federal Reserve?
Here are the correct answers, which, rather cleverly, are given in terms of fairly generous ranges: 1) 3600 to 3900; 2) 5 percent to 7 percent; 3) 2 percent to 4 percent; 4) 36 percent to 40 percent; 5) 8 percent to 9 percent; 6) $100 billion to $400 billion; 7) stocks; 8) more; 9) $15,000 to $30,000; 10) Alan Greenspan.
Add up your correct answers, and see what grade you got:
Nine or 10 correct answers: you got an A (excellent). Only 2 percent of adults earned this grade.
Eight correct answers: B (very good). Only 3 percent got a B.
Seven correct answers: C (satisfactory). Four percent got a C.
Six correct answers: D (needs improvement). Nine percent got a D.
Five or less correct answers: F. You failed, but you are not alone. A whopping 82 percent of adults failed this test.
OK, readers, so how did this financial "legend in her own mind" do? I got eight correct answers for a modest B grade. How come? Truth to tell, I misread the federal deficit question (No. 6) and answered the total deficit rather than the annual one. And being years away from retirement, I missed Question 9 on Social Security as well.
Why is this test important? According to Dr. Douglas Bernheim of Stanford University, who designed this test, more financially literate Americans tend to save far more than those with less knowledge of basic economic concepts. And, in my opinion, they probably invest more wisely, too.
Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan Bondy in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278. All letters will be treated confidentially.