2024

Avoid The Stock Market Game

Stock Market Game
Stock Market Game

We need to talk about the Stock Market Game.

Well, I need to write about it. There is something very wrong with the Stock Market Game.

However, before that, let’s get everyone up to speed.

What is the Stock Market Game?

The Stock Market Game is an educational tool designed to teach students about the stock market. Participants engage in a simulated trading environment where they buy and sell stocks, mutual funds, and exchange-traded funds (ETFs) using virtual money. Virtual money allows them to gain valuable experience without risking real money.

History of the Stock Market Game?

The Stock Market Game started in the late 1970s to promote financial literacy among kids. Over the years, it has evolved into a widely adopted educational program, reaching schools and colleges all over the world.

How Does the Stock Market Game Work?

Students use one hundred thousand dollars in virtual money on the Stock Market Game website to invest in stocks. It’s very realistic, which can help them learn how to use a brokerage platform using real money later in life.

Students learn stock tickers and how to place market and limit orders. They can work by themselves or in groups of up to five. The goal is to make the most money. The game lasts between 10 and 15 weeks. (It seems that the teacher may configure this, or different regions have different lengths.)

The Problem with Stock Market Game

A stock market simulation sounds like a fun way to learn a practical skill, right?

Unfortunately, it has one ginormous problem: The Stock Market Game encourages kids to invest recklessly.

Over a short period, a well-diversified ETF such as the S&P 500 Index or a Wilshire 5000 Index will never win the stock market game. Over a decade or more, the same well-diversified ETF will outperform nearly 90% of professionally managed funds.

In the Stock Market Game, there will always be a kid who got lucky on the first day trading some of the recent hot stocks. The kid could then sell and stay at the top of the leaderboard. Other kids who didn’t get lucky will probably lose money. They’ll make more risky bets at that point because that’s their only hope of winning.

Kids could lose 80% of their virtual money, and it wouldn’t matter. If they lose the game by $10, it’s the same if they lose it by $90,000. They weren’t planning to buy real cars or houses or save for retirement with it. In real life, turning $100,000 into $110,000 with minimal risk is rewarded with the ability to spend $10,000. In real life, losing $90,000 may mean working much longer than planned.

The Stock Market Game could do much better by teaching kids the investing basics of asset allocation and buy-and-hold (for years). It’s like giving kids a couple of games of Super Mario Cart as a test for their driver’s license. No one has ever played Super Mario Cart to complete the race safely.

Is The Stock Market Game a Scam?

I’ll let you be the judge, but Allan S. Roth, MBA, CPA, CFP® makes a good case in my opinion:

“Why would SIFMA want to teach maximizing risk? SIFMA stands for the Securities Industry and Financial Markets Association. Well, over half of its 520 members are broker-dealers. The SMG provides great benefit to those broker-dealers. If students do well in the game, they could take away the lesson that investing is easy and become a day trader. If they do poorly, they might learn the opposite lesson and believe that picking stocks is so difficult that they need to hire a broker to buy individual securities.

I view the SMG as yet another version of the financial services industry’s game of ‘heads we win; tails we win more.'”

Andy Hallam, a former teacher, has this to say:

Stock market games reinforce bad behaviours while crushing the good ones.

Nothing else in education is so inherently backward.

What’s better than the Stock Market Game?

I recommend reading Investing for Kids or visiting our Investing landing page (which is still under development). Another great resource is the MoneyTime Kids course.

Kids will learn a lot more if you let them make their own mistakes on a small scale.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

Five Ways to Teach Compound Interest

Teach Compound Interest
Look at the difference between compound interest and simple interest!

“My wealth has come from a combination of living in America, some lucky genes, and compound interest”
– Warren Buffett

When one of the richest people on the Earth gives actionable advice that anyone can take it’s worth listening to. He’s used the magic of compound interest better than anyone.

Here are four fun ways to teach compound interest to kids:

  1. Read A Book About Compound Interest

    My third grader did a play at school called One Grain of Rice. We had read the book earlier this year.

    One Grain of Rice is a lesson on how a grain of rice doubled every day for a month becomes a huge number – enough to bankrupt a kingdom. Substitute a penny for the grain of rice and there will be enough money to fill a mountain!

    Read my One Grain of Rice article here. It has an interactive spreadsheet, which illustrates it better than a compound interest calculator in my opinion.

  2. Use a Graph

    There’s a classic example of the power of compound interest that compares two investors. The younger person invests for a few years and then stops after 10 years. The slightly older person invests for 30 years and still can’t match the younger one. Here’s a graph of what that looks like:

  3. Give Kids Firsthand Experience

    You can read books about fixing cars or programming computers. Reading is not the same as doing.

    In The First National Bank of Dad (Review), I learned a technique where kids are given monthly interest payments on their deposits. Shorter compounding periods help kids notice the money growing faster. This creates an incentive to save more.

    For example, a 3% monthly interest rate is an annual 42% interest rate. It’s something that many parents can do because kids don’t have $100,000 of principal to break the bank.

    You may think that putting kids’ money in a traditional savings account is a great choice. However, the interest earnings are so low it will take them the rest of their lives to earn much. It’s no way to show how the rewards of compound interest are often described as the eighth wonder of the world.

  4. Watch a Video About How Compound Interest Works

    This video explains how the above works with a 10% monthly interest rate. It also illustrates how compound interest works over a lifetime:

    While the video says it is geared to grades 5-8, I think it works for grade 3 and maybe even some second graders. The multiplication at the beginning is the most difficult part, but it’s very quick and kids don’t have to follow the math exactly to get it.

  5. Take A Course
    MoneyTime is a course to teach kids about money in general. It covers much more than compound interest. MoneyTime has some gaming features like allowing kids to create their own avatar.

Teaching compound interest to kids is especially useful because they have more time to grow their money. The video above showed how much of a difference there is between an 18 and a 25-year-old saving over time. Imagine if you can start even seven years before the video’s example.

Parts of this article were originally published July 8, 2022

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth