Investment game sends a mixed message

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 SIA took its first steps toward teaching those children about mutual funds.

The real question is what lessons the students will learn.

In answering that question, fund investors may uncover good lessons to teach future generations. Some 500,000 students play the Stock Market Game each year.

The contest runs for 10 weeks -- it is held a few times during every school year -- and allows kids to manage a virtual $100,000 portfolio online.

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

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

That's good and bad.

With mutual funds being a staple of retirement and college-savings plans and part of nearly half of American households, including funds in the education process is a big step in the right direction.

Children need to learn about funds because they are likely to become fund clients, and participating teachers recognized that excluding funds limited their ability to teach real-life investing skills.

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

Years ago I ran a newspaper reader competition in the game and played myself.

The experience reinforced the idea that 10 weeks is a lot different than 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 mindset.

In general, that means investing as much money as you can in just 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 bounce in and out trying to capture quick profits.

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.

While you can play rapid-fire trader with funds, 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 to succeed than ever.

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

And while the children may have access to funds that are built to be market-timing vehicles, you have to believe they would have a tough time knowing enough to buy a fund that they expect will do ''double the inverse of the market" if they think tough sledding is ahead.

The other problem with the game -- unrelated to the inclusion of funds -- is that $100,000 is too much to play with.

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 portfolio.

They won't win, but the bigger problem is that they can't relate. They feel no pain if they suffer losses and they don't get thrilled over gains because they invested so little that the impact is tiny.

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

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

Small positions in real stocks or funds result in gains and losses to which kids can relate.

Teaching those very personal lessons over time highlights the benefits of long-term investing, and will keep the kids interested even though there is no trophy on the line.

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

It's great that funds are now part of the Stock Market Game.

It would be better if parents helped make sure they were part of their kids' lessons from home.

Chuck Jaffe is a senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.