Mr Whippy money lesson
Two teenagers robbed a Mr Whippy ice cream van owner at gunpoint in the shadow of the Michael Joseph Savage Memorial in Orakei, Auckland, a few weeks back.
I feel for the owner who the two youths threatened to ‘‘put a hole’’ in. I’ve been subject to two violent attempts on my person, one that damaged me, and the other far more serious, that didn’t leave a mark.
But I also feel pity for the two idiots with the gun for their spectacularly poor grasp of risk and reward.
When deciding where and how to invest your money, the key is to work out whether the reward you believe you will get is worth the risk you are taking.
In the case of Mr Whippy robbers one and two, the best reward they could hope for was a box of flakes and a bag of loose change. The risk is the sentence for aggravated robbery, which is up to 14 years in prison.
Life is a series of risk/reward choices, some easy to see, and some hard to see. It is easy to see you are making a risk/reward choice when you pick a growth KiwiSaver fund instead of a conservative one. It’s harder to see that habit of spending $20 a week on dairy pies and energy drinks as having anything to do with risk and reward. But it does.
That $80 spent in January doesn’t feel like a problem. Nor in February. March passes without a hitch. April goes OK. In May the car breaks down. That $300 which leaked away on pies and Red Bull would come in mighty handy.
The reward of that full-tummy pie feeling, and the energy drink buzz are immediate and clear. The risk of needing $300 in April is not. Trivial as my pie and Red Bull example may sound, it’s the adding up of such little things that often wrecks long-term prospects. I see folk spending on trivialities as if their pension pots are filled to brimming, or their mortgages are long since paid off.
Another way of seeing all this is to think about risk/reward choices as ‘big picture’’ choices and ‘‘little picture’’ choices. Big picture choices are things like: I will be a saver. I will be slim. I will have a good nest egg in retirement. The little picture choices follow.
Because I will be a saver, I will decide how much I will save each week (little choice), and trim my spending to do it. Because I will be slim, I am not going to eat more than one pie a week. Because I want a good nest egg in retirement I will choose a higher risk/ higher return KiwiSaver fund.
The great thing about the big picture/little picture approach is that it provides a measure of insulation against the enemy of sensible risk/reward choices: What everyone else seems to be doing.