As a certified financial planner and certified public accountant, I'm pretty well versed in investing. Not that I don't think I could still learn a thing or two, but it never occurred to me that it would be from my son Kevin. When he turned eight, I thought I'd pass on some of my knowledge of investing. Surprisingly, I'm the one who got the education. Since Kevin was nice enough to teach me, I thought I'd pass on some of the lessons.

First, some background. As Kevin entered second grade, he got a little money from his grandparents. Being the nerdy dad, I used this as an opportunity to teach him that costs matter and diversification helps. Rather than debate the efficient market hypothesis or discuss the formula for standard deviation, I chose two simpler lessons:

• 10-2=8 (arithmetic of investing)
• Don't put all your eggs in one basket (diversify).

These lessons led to a portfolio containing a Total U.S. Stock Fund, a Total International Stock Fund and a Total Bond Fund. With such a portfolio, even a second grader can own the world.

The portfolio gained a lot of traction when it became the newest entrant to the "Lazy Portfolios" in Paul Farrell's "DowJones MarketWatch" columns (along with portfolios from experts like William Bernstein and David Swensen). Encouraged by this turn of events, I decided to expand Kevin's investing education.

Back to Basics

Here are some of the lessons learned from a second grader that sophisticated planners should keep in mind as they help their clients:

Don't act silly with money. By second grade, Kevin's mom and I had taught him that it was better to buy something when it was on sale than to pay full price. As adults, however, we seem to do just the opposite when it comes to money. Record amounts flow into the stock market just as it peaks and then out again after the fall. Any second grader could see the folly of lining up all night long for a Macy's "We've Doubled Our Price Sale." Adults don't seem to grasp that we tend to do just that in the stock market.

Although as planners we should know better, the data shows otherwise. A recent study by three professors, Daniel Bergstresser, John R. M. Chalmers and Peter Tufano, Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry, showed that financial planners tend to chase performance every bit as much as the consumer who buys a fund directly.

So while we could be adding a lot of value by providing focus and discipline, we often run toward what has recently performed well. It's simple to tell our clients they need to stay the course and rebalance now that stocks are available at such a discount, but it's not easy. Do we really think the risk profile questionnaires our clients complete would reflect the same results today as they did in 2007, when the market had five steady years of gains at its back?

Understand the game before you start playing. If nothing is at stake, it's okay to learn as you go. On the other hand, if something is at stake, you must understand it before you play. Most second graders know that if you don't know the rules, you can't win the game.

The sophisticated investors who handed $50 billion to Bernie Madoff probably never cared about learning. By second grade, Kevin was getting suspicious about whether Santa Claus really existed, but no way would he believe that the rabbit was really coming out of the magician's hat. Sophisticated investors, however, bought it hook, line and sinker that someone could make these consistently brilliant returns, no matter how the stock market performed. After all, even Warren Buffet has some bad years.

Kevin would have wanted to see what his money was invested in. Apparently, this part of due diligence wasn't necessary for the big investors. I feel awful for those who lost their life savings in the Madoff scheme, but I also believe they weren't completely blameless. Such things happen when one ignores basic second-grader rules.

Don't lend money to someone who won't pay you back. We all know the story of our current financial crises—NINJA (no income, no job or assets) loans. By second grade, however, we all know who the kids are who we won't trust. Kevin would never lend money to one of his classmates in particular, no matter what the interest rate was. He wanted to get his money back.