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How Luck, Risk and Money Combine!

When people see others growing their money, they feel those people have taken a ‘Risk’ and got ‘Lucky’. In this blog, I share a story I told my daughters to help them understand how you need to take some risks to help your money grow. The key is to make sure you know what risks you are taking to ensure you are lucky more often than not.


The Lucky Sisters Story


Two sisters, Lucy and Rita, were walking down a street when they noticed a ticket on the floor. It was a lottery ticket.


After waiting for a couple of hours to see if anyone came back to pick it up, they decided to keep it and went home. At 6 pm they watched the TV and checked to see if they had a winning ticket.


They watched as the numbers appeared. They had the first three numbers on their ticket. The fourth was different but the fifth and sixth numbers were on their ticket. They had just won £10,000 which they decided to split £5,000 each. They couldn’t believe it.


“We ARE so lucky. We were lucky to be the ones who found the ticket and then we were lucky to win this money!” said Lucy “Everyone should now call me ‘Lucky Lucy’!”

Lucky Lucy Keeps Trying Her Luck


Lucky Lucy decided she would try and make even more money with her winnings. She bought a thousand more lottery tickets. She also went on the internet to see what other lucky people did to get their money. She discovered that they ‘invested’ in digital artwork and some digital currencies that had just been released. She decided that she should do the same if they were lucky like her.

Sadly for Lucky Lucy, it didn’t work out. None of her lottery tickets won. All the money she ‘invested’ didn’t work out. She was left with just £1,000 from her original £5,000.

“This is so unfair - we must have used all my luck when we found that winning lottery ticket!” said Lucky Lucy!


Rita Takes A Risk

After finding the winning lottery ticket, Rita felt that they GOT lucky rather than they ARE lucky.


Rita decided that with the £5,000 she had won, she could afford to take some risks to make her money grow further. Although, compared to Lucy, she wanted to only take risks which would mean that she was more likely to make money than not. She wasn’t going to buy lottery tickets as she knew the chances of being that lucky again were so slim.

Rita decided to put some money in the stock market. She knew that it was risky as the amount of money she invested could go down in value but she believed that as long as companies kept getting people to spend money, they would grow and she would make money over the long term.


Rita tried to convince the now ‘Not-So-Lucky-Lucy’ that she should do the same with the £1,000 she had left. Whilst it ws risky, she was more likely to make money over time. Lucy said “Not right now. I don’t want to take that risk and lose my £1,000. I’d only invest my money in the stock market if it was the perfect time to buy. I don’t think now is the right time, I’m going to wait. I’m not like you ‘Risk It Rita’”


Lucy watched ‘Risk It Rita’ invest her money and saw it grow over time. It went from £5,000 to £10,000 after 10 years. Then it went to £20,000 after 20 years.

Lucy couldn’t believe it. “How did you know to invest at that time? You are the lucky one!”


Risk It Rita explained “I didn’t know when would be the best time to invest, I just started investing. It wouldn’t have mattered if I had invested 1 month before or 1 month after from when I did invest. I would have still made money. It might have been a bit more or a bit less than I did but I would have still have made money. I was lucky that a friend bought me a book to help me learn about investing so I could make money. Most people never get the opportunity to learn about investing.”

Rita helped her sister to learn about different risks and then put her money in places where she was more likely than not to see her money grow.

The End!


Message from the story


To see your money grow, you need to take some risks. The key is to make sure you understand the risks you are taking. You only want to take risks where you are expected to be ‘lucky’ more often than not.


The stock market is an example of how people can make their money grow. When we talk about the stock market, people usually fit into one of three different groups:

  1. Avoiders: People who don’t like to take any risk and avoid the stock market

  2. Gamblers: People who believe they can make money quickly by investing in the stock market

  3. Investors: People who accept that they could lose some money but with the odds on their side can make money over the long term

The Avoiders never see their money grow as they are never in the position to be “lucky”

The Gamblers sometimes get lucky and see their money grow. However, as no one knows what the stock market will do from one day to the next, they get disheartened when they get unlucky and see their money fall in the short term. They then decide not to take more risks in the future (like Lucky Lucy in the story).

The Investors are the “lucky ones” (the Risk It Rita’s). Over the long term, they see their money grow more often than not. They understand that there is still a chance they may lose some of their money but also know that the longer they stay invested the more likely it is they will see their money grow. The picture below shows the chances of making money if you invest your money in the US stock market over different periods (based on what has happened over 100 years).

Probability of losing money by investing in the stock market over time
Based on the S&P500 (500 biggest companies in the US)

This shows that over 1 year, you could be ‘unlucky’ 38% of the time. However, if you stay invested for over 10 years, you are expected to be lucky and make more money than you started with 95% of the time.

We need to teach our kids that to make money grow, they need to take some risks. They just need to make sure that the odds of making money are in their favour and that they only take risks with money they can afford to lose.


This is why it’s so important to teach kids about the 3 rules of wealth. The first rule, “Keeping 10% of all the money you receive”, allows them to have some money which they can afford to take some risks with. The second rule, “Invest what you save”, means taking some risks (but the right risks). The third rule, “Be patient”, highlights that to be ‘lucky’ you need to be willing to accept that you might be unlucky sometimes but if the odds are in your favour you will be ok over time.


Putting Risk In A Different Context


To help the Avoiders take some risks, I get them to consider ‘spending as a risk’:


When you spend money, you are never going to see that money again. It’s gone with 100% certainty.


When you invest, the chances of losing all your money are much less than when you spend.

If you are happy to spend £50, you should be happy to invest £50. Especially as that £50 could be £100 in ten years, £200 in twenty years, £1,600 in fifty years.


Summary


To become wealthy you need “luck” and that means taking some risks.


We should encourage kids to take some risks. Helping them understand what risks are worth taking (e.g. investing) and which are not (e.g. gambling). By taking some risks they might not always get lucky but should understand that if they take the right risks, over time “luck” will be on their side.


Help your kids start taking a bit of risk by opening up an investment account for them. Over the long term, they will see that by taking some risks, that is how they grow their money. It’s never been easier. If you are not sure where to start, please see my free guide here.


Thanks for reading!


Will


P.s. if you want kids to learn about gambling and investing, why not get them a copy of Grandpa’s Fortune Fables?


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