Last week, the SEC released a wide-ranging report on financial literacy in the U.S. And the conclusion is clear: We're not there yet. Not even close. Yet the consequences have never been greater.
Corporate pension plans have gone the way of the Passenger Pigeon. And without serious reform, Social Security - according to that agency's own website - will soon be done in by time and arithmetic. At the very least, the age of initial eligibility is likely to be raised dramatically in the years ahead...
To a great extent, we Americans are on our own. Yet need to understand basic financial concepts - and apply them. Yet the SEC report - and others like it - shows that the vast majority aren't ready.
A 2008 Heath and Retirement Survey concluded that most Americans "lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice and investment fees." The most common response to most questions in the survey was, "Do not know."
Ignorance Gets Really Expensive, Really Fast It's a shame that even good students graduate from high school today without understanding compound interest, variable-rate mortgages, Roth IRAs, what a bond is or why we have a stock market. Teachers will argue that students suffer from historical or scientific illiteracy, too. But being unable to find Spain on a map or not knowing who Michelangelo was are not going to cost you tens of thousands of dollars over your lifetime.
When it comes to money basics, ignorance gets really expensive, really fast. Yet here are just a few highlights from the new SEC report.
When asked the primary benefit of portfolio diversification, respondents were given three choices: a) risk reduction, b) increased returns, or c) reduced tax liabilities. Only 56% knew the answer was A. Then again, even if they had no idea whatsoever, respondents had a 33% chance of getting it right. The reality is that most participants didn't even know this most basic piece of financial wisdom.
A Crying Shame... When asked whether a young investor willing to take moderate risk for above-average growth should invest in a) Treasury bills, b) money market funds, or c) balanced stock funds, 63% of respondents chose the wrong answer - and even 49% of fund owners didn't know the correct answer was C.
When asked whether a traditional IRA, a 401(k), or a Roth IRA offered withdrawals that are tax-exempt, only 44% knew the correct answer was a Roth.
This is a crying shame, especially in a country like ours where citizens are given the freedom and opportunity to pursue financial independence. Instead, too many learn the hard way, falling for the siren song of an expensive insurance agent or transaction-based broker ... or committing hari-kari in a discount brokerage account.
What is the solution? Teaching basic financial literacy in every public high school in the country would be a good first step. But education reform is slow and difficult, not least of all because less than 20% of teachers polled said they felt competent to teach saving and investing.
Fortunately,
Investment U exists to fill this gap. We cover everything here from the most basic principles to the most advanced strategies - and tie them into what's happening in today's stock, bond, currency and commodity markets.
So stick with us. We're committed to sharing the secrets of investment success. And - since this service is free - the cost is only five minutes of your attention each day.
That's a pretty modest trade-off for something that can mean the difference between being comfortable and secure ... or being a burden to your family or a dependent of the state.
Good Investing,
Alex
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