A Brilliant Way to Teach Teens About Investing Part 2

A great way to lose money!

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On July 27th, we put out a video about a unique way a couple of parents were teaching their kids about the world of investing. As part of their unusual method, they instructed their offspring to invest in two publicly-traded securities, that after a reasonable amount of research, they felt would perform quite poorly going forward.

How odd. Why would they instruct them to do that? Well, intentionally searching for some of the qualities that make an investment unwise by experimenting with a small amount of money is a lot better than accidentally discovering those qualities later with a big amount. So, the two teenagers turn to online forums and ChatGPT to initiate their research efforts.

And hey, to their credit, they came up with the winner. Or a loser depending on how you wanna look at all this. They bought a 3X leveraged ETF, two actually. What the heck is that? Stick with me — you’ll enjoy this, I promise. Now, let’s not get too in the weeds. Essentially, it’s a fund that uses leverage,

ie borrowed money and derivatives to triple the daily moves of an index up or down. “Sounds exciting,” you say. Well, they are that, but over the long term, their performance is likely to be very poor. Why? Well, even if you hate math, you’ll find what I’m about to do interesting. Really. Let’s say one day the market priced at 100, goes up 10%… so now, of course, it’s at 110.

The next day it goes down 10%. Instinctively, many say, “Oh, it’s back to even.” No. When something at 110 falls 10%, it falls 11 to 99. Darn, after two days, you’re down 1%. Not the end of the world though. But let’s look at the 3X leveraged fund. The market goes up 10% one day, but that’s 30% now because we get three times.

It’s at 130. Woo hoo. How exciting this is. Then it goes down 10% the next day, but that’s down 30% with our fund. What’s 30% of 130? 39. What’s 130-39? 91. Oh my gosh. We’re down 9%. The market’s only down 1%. That is horrible. Well get used to it. You’re going to have a lot of that going forward.

That’s why the kids chose this vehicle. Over the long term, that decay math, as it’s called in the industry, will bite you almost every time. Now could this fund shock and do well on the upside? Sure, anything can, but would have to have a relatively smooth journey because volatility is its enemy. And guess what?

Markets are volatile. Volatility, the enemy lives right in the house. Be very careful of these. A job well done by the kids.