When is the biggest risk, not taking a risk?

We live in a world where we, as parents, are doing increasingly more to protect our kids.


When my kids go outside I say “Make sure you stay where I can see you!”

When I was going outside as a kid, my parents would say “Come home before it gets dark.”

Granted, my parents still weren’t as relaxed as this adult even whilst he watched the kids!


The question is, in our quest to protect our kids:

Are we taking away their ability to assess risks for themselves?

One argument is that we live in a more dangerous world now so we need to be more protective. Is this actually true? Is the world more dangerous or do we just believe it is?


I’d strongly recommend you watch the first 5 minutes of this really entertaining and enlightening video about our views on the dangers today versus the past:


Essentially, many risks we face are actually much less than anytime in the past but we feel the risks are higher due to mainstream, and social, media. We focus on the micro events and miss the fact that the world is becoming safer. Granted the Covid virus might make that point seem untrue but if the virus had hit anytime in the past, the impact would have been significantly worse than we are experiencing now.

I’m not saying that parents should stop caring and just let their kids take lots of risks. It’s more that we need to help our kids understand risks and give them an opportunity to assess the risks and rewards of certain actions.

Why am I talking about risk when my focus is on kids and money?


If our kids grow up scared to take risk, or not able to assess risk for themselves, then they are going to potentially miss out on some rewards. When it comes to money there are times when taking a risk could lead to great rewards.

Here’s a question for you:


What’s the chances of you having less money than you started with, if you put that money in the stock market for 10 years? (assuming you put it in the US stock market)

  1. Greater than 50% chance of having less money

  2. About 50%

  3. Less than 50% chance of having less money

Scroll down for answer:

Answer: 3 - Only 3.4% chance of your money being less than you started with! (this is based on over 100 years of data of investing in the US stock market, S&P 500)


The average ten-year return (reward) has been over 8% pa (significantly higher than a savings account and, importantly, higher than inflation).

Why is investing seen as risky?

Investing in the stock market is seen as risky for many people as they hear stories on the news and on social media of people losing a lot of money.


This media attention is based on:

  1. “Stock market falling 30% in a day” or

  2. “Company XYZ goes bust, investors lose millions”.


These are scary headlines!


Let’s just break this down to understand those two ‘risks’:

  • Stock market falling 30% in a day: Don’t get me wrong, the stock market can go all over the place over a short period of time. In fact, over a one-year period, there is about a 50/50 chance of the stock market going up or down on a given day. So, if you want to make sure you don’t lose money in the short-term, then don’t invest in the stock market as it’s too risky. As shown above, over a 10-year period, the chances of the stock market being lower than when it started is only 3.4% (i.e. there is a good chance of making money by investing over the long-term).


  • Company XYZ goes bust: Companies do go bust and people who invest in those companies will lose money. The key is to make sure that you don’t invest too much in an individual company. If you invest in the entire stock market, you invest in thousands of companies. This means that even if some companies go bust, over the long-term you are much more likely to do well. Especially, as you’ll have some exposure to the companies that do really well over time. This approach means you are managing the risk of a company going bust.

The above shows that whilst the headlines make the stock market appear risky, we should stop and consider 'what is the actual risk to me?'. The stock market is risky for people wanting to make money quickly (short-term) or those invested heavily in individual companies. For people who invest for the long-term and invest in lots of different companies, these risks should not have a material impact.

That isn’t to say you can’t lose money investing. Based on history, there is a chance of losing money over 10 years. This risk has to be compared to the potential rewards from taking this risk. In most cases, the rewards have outweighed the risks. The longer you invest, the better the chances of being rewarded for the risk taken.


Different mindset when looking at stock market falls:

When it comes to investing, I get my daughters to see the risk of investing in the stock market in a completely different way. I tell them that when they put their money into the stock market they are planting a tree (a Blue Tree).


These trees take time to grow (so they aren’t expecting results straight away). They also know there could be storms that break their trees (a fall in the stock market). Instead of being scared of storms, my girls know that trees recover and will grow back bigger and stronger over time.


Better still, they know that if there is a storm the ground is ripe to grow more trees. This means my kids see the stock market falling as a good opportunity to invest more as companies are cheaper to buy.


As the saying goes:

“Be fearful when others are greedy and greedy when others are fearful”.

Making money grow can be life changing


Teaching kids about investing can be life changing. It helps them understand (and witness) that money can be earned whilst they sleep (not just getting paid for their time).


This is why investing money is the second of the 3 rules of wealth:

  1. Send less than you receive

  2. Invest the difference

  3. Be patient

The younger your kids start following these rules, the better.


Importantly, it will hopefully allow them to understand risk in a different way, which I hope they will be able to apply in different areas of their lives.


If you would like to learn more about investing, here is a simple FAQ to help

Assessing risks in other areas

Investing in the stock market isn’t the only money related area where I believe people overestimate risk. The other area is entrepreneurship, especially for young adults (who have limited money to lose and no dependents). I’ll save that for another blog so make sure you subscribe below so you don’t miss out.


Thanks for reading!


Will

p.s. one area that people are increasingly worried about is financial scams. Here’s a blog to help you teach your kids about scams and what you can do to help them avoid them.

© 2020 Blue Tree Savings Ltd. All rights reserved.

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