Takeaways from Our Interactive Investment Roulette Game
How we're helping teachers help students understand the power of investing.
Financial education is important for everyone and, from time to time, gets some support for inclusion in the high school curriculum. It’s not, however, a core subject and doesn’t get the same level of attention as other subjects.
With all due respect to calculus, few things have the potential to help students in life after school than financial education—especially investment education. It’s literally life changing.
Unfortunately, while high school resources teaching topics like budgeting are fine, what is offered regarding investing is sparse and often incorrect. Certainly not inspiring.
Our high school programs are designed to change that, starting with making it easy for teachers to teach investment topics in the right way without needing to be experts in investing themselves (teachers tell us they learn as much as their students do).
Our latest initiative is an online, interactive version of our Investment Roulette workshop. It’s a somewhat over-the-top, cool introduction to key concepts of investing that students love.
Teachers divide a class into four teams and designate a captain for each team. The program does the rest.
If you know any teachers who would like access to the program, please have them contact us. We’d like to impact as many students as possible.
One thing we provide the students and teachers with is a PDF with takeaways from the program. We thought it might be a good idea to reproduce that as this week’s post.
The Payoff
Few things will have a greater impact on your life than learning and understanding long-term investing. It’s, quite literally, life changing.
Time
The most important factor in investing is Time—it changes everything. You’ve likely heard a statement like, “Stocks are risky.” The problem with this statement is that it does not mention a timeframe. Of the three major asset classes (Stocks, Bonds, and Cash), Stocks are clearly the most risky asset over short-term time periods. But, Stocks are the least risky asset over long-term time periods because they give you the best chance of achieving your long-term financial goals.
The Secret to Investing: Compounding
The key to growing wealth over time is Compounding. It’s essentially your money going viral, but it seems too good to be true.
The challenge with compounding is that it doesn't happen overnight—it takes Time.
One of the most important numbers to know relative to any investment portfolio is the long-term compounding rate of the portfolio. Most people don’t know this. They don’t even know they should know this.
The historical long-term compounding rates of the major asset classes and the value of a one-time investment of $10,000 compounded for 40 years are roughly:
Stocks: 10% ($453,000)
Bonds: 5% ($70,000)
Cash (short-term investments): 3% ($33,000)
The differences in the long-term values of the one-time investment are staggering. This is why focusing on your long-term compounding rate is so important.
Asset Allocation
When it comes to investment strategy, the biggest decision you make is how to mix up the different types of investments in your portfolio. This is called Asset Allocation and has a direct impact on your long-term compounding rate.
If you have a portfolio invested 100% in Stocks, your expected long-term compounding rate would be 10%. If you’re invested 60% in Stocks and 40% in Bonds (a very popular strategy), the expected compounding rate would be about 8%.
This is a huge difference. A one-time investment of $10,000 in this case would grow to about $217,000—less than half the value of compounding at 10%. And that can have a massive impact on your future financial well-being.
Note that these long-term compounding rates are historical averages. The main point is that long-term returns tend to gravitate toward these historical averages over time.
Short-term Volatility
One of the challenges to taking advantage of compounding is that it takes a long time. It’s sometimes hard to make smart decisions today that won’t pay off until years down the road.
That said, one of the most common regrets of people approaching or in retirement is that they didn’t know about the power of compounding when they were younger. No one told them.
Perhaps an even bigger challenge is that experiencing investing in real time—living the daily ups and downs in the stock market—forces your attention on short-term volatility.
If you don’t have a good understanding of long-term investing, this can be alarming.
One of the biggest mistakes investors make is overreacting to short-term declines in the stock market. It’s easy to think you should move out of “risky” stocks into more “conservative” assets.
Of course, the long-term cost of this decision—which lowers your long-term compounding rate—can be staggering.
Learning to ignore the daily investment commentary and predictions—which are never right—will inevitably lead to having more money in the long run and less stress along the way.
A Better Definition of Risk
The financial industry tends to define risk based on short-term volatility. It makes no sense to apply a short-term risk measure to long-term investing. More than that, it’s dangerous since it tends to lead people to making poor investment decisions.
A better definition of risk is:
The least risky strategy is the one that gives you the best chance of winning.
Winning simply means achieving your long-term financial goals.
Using this definition, you should never put Stocks in your short-term portfolio, and you should use a high allocation to Stocks in your long-term portfolio.
Building Confidence
Leonardo Da Vinci said, “Good judgment is born of clear understanding.”
Investing seems complex and—with the overwhelming amount of conflicting information coming at you on a daily basis—can seem confusing.
Educating yourself about investing—the clear understanding Da Vinci is talking about—is one of the smartest things you can do to build confidence in the process and make it easier to make the good decisions that will pay off—quite literally—down the road.
Again, if you know any teachers who might have interest in the program, have them contact us.
All areas of financial education are important, but investing is the concept that can have the biggest impact on students’ future financial well-being. Unfortunately, it’s the most challenging aspect of financial education to teach and most resources do it poorly—often teaching the wrong things.
We’re doing what we can to help teachers make a meaningful difference in their students’ lives in the right way.
Best regards,
Stuart & Sharon
My group really liked the investment game it taught us that sometimes being risky with your investments is good to make more money, but it could also be bad because you can lose a lot of money at one time.
I am a high school student that just played investment roulette, and it taught my group and I valuable lessons about investing. While playing the game, we learned that the outer wheel was a "go big or go home" as it would have the most return, but it could also harm us. There was the inner wheel, which was a guaranteed return on investment. Finally, there was 50/50 which we would gain half of our investment or lose half of our investment. This article backed up what we learned from the game because of the section about compounding our money. Stocks would gain a 10% return on investment, bonds would have 5%, and cash investments would have 3%. This relates to the game because stocks resembled the outer wheel, bonds would represent 50/50, and cash would resemble the inner wheel. Knowing this, if you invest your money into stocks or "the outer wheel" you would have a greater return in the long run.