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Stocks, bonds and what? People need to learn more about investing

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Financial literacy or a pair of shoes?

Last year I blogged about financial literacy in Canada.

Statistics about kids and adults are a little worrying when it comes to financial literacy. From new data, Americans aren’t much different. Studies show people need to do a lot more to become financially knowledgeable.

Juggling the egg

I recently overheard this: “What’s in your portfolio?”

Blank stare, and then: “I own XYZ.” (One of the biggest stocks in the U.S.)

That’s it. XYZ. Nothing else.

But wait! XYZ’s done great! It should go up forever or even longer.

Hmmmm … The thing is:

Those are the two “it’s different this time” ideas that have humbled investors since stock markets were born. Short-term thinking … People forget that the XYZ’s of this world have been a long interchange of different companies throughout investing history.

Do you really want one egg dictating your financial future?

Investing without diversification is potential financial suicide. (Or at least financial Russian roulette.)

Momentum is a marvelous thing when it’s on your side. But your worst enemy when the tide changes.

Ask former RIM, Palm, Nortel, Enron, Lehman Brothers investors.

If this had been your only stock, how would you have felt? What would have happened to your portfolio?

Know what you know:

Find out what you don’t know

According to the Investor Education Foundation of the Financial Industry Regulatory Authority’s study in the U.S.:

  • 67 per cent rated their financial knowledge as “high”

but,

  • Only 53 per cent answered this question correctly:

True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

I doubt that most of these respondents were momentum traders trading single stocks. It’s more likely that the majority had no idea that this is one of the most important rules of wealth creation: Diversification.

  • Only 6% got the above question wrong, choosing “True.”

But,

  • 40% said they didn’t know the answer, and 1% declined to answer

Ouch.

Maybe it was just an anomaly.

Let’s try again:

If interest rates rise, what will typically happen to bond prices?

Rise? Fall? Stay the same?

No relationship?

  • Just 28 per cent answered correctly

Yes, they will usually fall.

  • 37 per cent didn’t know
  • 18 per cent said bond prices would rise if interest rates rise
  • 10 per cent said there’s no relationship between bond prices and interest rates
  • 5 per cent said bond prices would stay the same
  • 2 per cent said they preferred not to answer

Becoming a statistic can have long-term complications

Looking at these stats shows there’s a lot of financial illiteracy out there.

It’s a crime that financial literacy is not taught in high schools.

— Michael Finke, professor of personal financial planning at Texas Tech University/co-developer of the Financial Literacy Assessment Test, part of Ohio State University’s Consumer Finance Monthly survey.

(In Canada, things are changing.)

Can teachers help?

When asked about six personal financial planning concepts:

  • Fewer than 20 per cent of teachers and teachers-in-training said they felt “very competent” to teach those topics
  • Teachers felt least competent about saving and investing

   — 2009 survey of 1,200 K-12 teachers/prospective teachers National Endowment for Financial Education

What do you do if teachers don’t feel competent to teach financial literacy skills?

Governments …

  • Need to focus on helping teachers get these skills

or

  • Need to bring in outside help to assist in improving financial literacy skills

Agencies are doing their part in both the U.S. and Canada to raise awareness around financial literacy. They can’t do it alone:

  • Parents need to teach their kids about debt

But parents need to understand the dangers they’re trying to warn their kids about.

The consequences to our economy and economic future of financial illiteracy are immense. Championing long-lasting positive changes for kids (and adults) is important.

Those shoes were made for walking (but they could really cost you)

Study after study has shown that adults will spend more time focusing on buying a pair of shoes (or other purchase) than they will on their financial future.

Is this the legacy we want to leave our kids?

Find out more about diversification:

You don’t need to listen to Warren Buffett (if you’ve allocated your investment portfolio properly)

A simple way to arrive at the right asset allocation for your portfolio

Get the balance right

Plan like a pension fund manager when it comes to your investment portfolio

Asset allocation: Diversification is king

How to be a smarter investor

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