Children need real mutual fund game

Your Funds

Your Money

October 03, 2004|By CHARLES JAFFE

SINCE 1977, more than 9 million children have learned about stock investing through the Stock Market Game, an interactive 10-week contest run by the Securities Industry Association for children in grades four through 12.

Recently, the Securities Industry Association took its first steps toward teaching those youngsters about mutual funds. The questions are what lesson the students will learn and what fund investors will teach future generations.

About 500,000 students play the Stock Market Game each year. The contest runs for 10 weeks - it's held at different times every school year - and allows kids to manage online a virtual $100,000 portfolio.

The aim of the game is to teach kids about investing and saving, about the benefits of doing research and about the basics of trading securities.

In conjunction with the ICI Education Foundation (an affiliate of the Investment Company Institute, the fund industry's trade association), the game will include 17,000 mutual funds this year.

That's good and bad.

With mutual funds a staple of retirement and college-savings plans, and part of nearly half of American households' portfolios, including funds in education is a big step in the right direction. Participating teachers recognize that excluding funds limited their ability to teach real-life investing skills. Children also need to learn about funds because they are likely to become fund consumers.

But having funds in the Stock Market Game might give the wrong message because you'll have a heck of a time winning the game by using funds.

Years ago at The Morning Call in Allentown, Pa., I ran a reader competition in the game and played myself. The experience reinforced the idea that 10 weeks is a lot different from 10 months or 10 years.

If you play to win the game - and winning is what the kids focus on - you must invest with a short-term mind-set.

In general, that means investing as much money as you can in a few issues. Forget diversification and play the volatility, because that's what can separate your team from the pack. Top teams sometimes buy and hold a few issues, but more frequently they bounce in and out trying to capture quick profits.

But mutual funds are diversified investments. In general, they're not built to capture today's market bump, but rather to capitalize on broad trends over a long time period.

You can play rapid-fire trader with funds, but it makes for tough sledding. With most funds having added short-term redemption fees in the wake of the improper trading scandals, wheeling and dealing in funds is less likely than ever to succeed.

The game ignores those short-term fees, which might help players win with a strategy that would fail the real-life test.

And, although kids may have access to funds that are built to be market-timing vehicles, you have to believe they would have a hard time knowing enough to buy a fund that they expect will do "double the inverse of the market" if they're apprehensive about the future.

The other problem with the game, unrelated to the inclusion of mutual funds, is that $100,000 is too much. Go to a classroom to discuss the game and you are likely to find several teams that have invested just a few thousand of that virtual purse.

The bigger problem is that they can't relate. They feel no pain if they suffer losses because $50,000 would still seem like a fortune, so it's not as if they can imagine the magnitude of such a decline. And they won't get thrilled over gains because they've invested so little that the impact is tiny.

Ultimately, the inclusion of mutual funds is a big boost for the Stock Market Game. It gives teachers and parents that much more reason to want to include the activity in school curricula, and it makes a good learning tool even better.

But even if a school doesn't participate, parents and grandparents can be teaching children about investing, using small amounts of real money or virtual portfolios to keep it real.

Small positions in real stocks or funds can result in gains and losses that kids can track. Teaching those very personal lessons over time highlights the benefits of long-term investing, and will keep the kids interested even with no trophy on the line.

Mutual funds can be ideal investments for children. They can have low costs of entry, they bring the benefits of diversification and can help a child realize the benefits of starting small and letting time and the market do the rest.

It's great that mutual funds are now part of the Stock Market Game. It would be better if parents helped to make sure they were part of their kids' lessons from home.

Chuck Jaffe can be reached at jaffe@marketwatch.com.

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