Having spent a great deal of my “growing up” in Louisville, KY, I was extremely interested in and, eventually, overjoyed to watch the Louisville Cardinals win this year’s NCAA Men’s Basketball National Championship. I found it ironic that I remember watching Louisville win their first ever championship in 1980, when I was 10 – and on Monday night I watched them win again, with my 10 year old son just as interested as I used to be.
As many of you probably have done, we participated in “bracket pools” where people pick winners of each of the 63 games in a contest that does not contain much value other than bragging rights. During this process, I realized an opportunity to teach my 10 year old son (and 12 year old daughter) a valuable lesson about the relation between risk and reward.
I made a deal with both of my children. If I put up the $5 entry fee to the pool, and they put nothing into the pot, then I get half of whatever is won during the pool. If they put their own money in the pot, then ALL of the winnings are theirs. My son, ever the risk taker, wanted to put his own money into the pot, because he was not excited about sharing possible winnings of $60 with his dad. My daughter, whom I know is much more conservative, was happy for me to take all the risk – even if she only won half of the reward. She essentially was happy to win something for nothing. She eventually finished second and had to split the $20 winnings with me.
As I look at it afterwards, I realize how similar this experience is to many of our investment behaviors and advice that we discuss with clients. Risk and return are always related…and pre-teen kids get that when faced with real life scenarios. It is very hard to teach kids about financial risk and reward unless it is “their” money at stake. But what a valuable and transferable lesson to take through life!