There are many readers who take a rather dim view of how financial literacy is seriously lacking in our current society. However, it is often easy to forget the amount of information that beginners need to learn. The month of April is actually Financial Literacy Month. This is something that definitely is needed as can be seen in surveys such as the one conducted by the American College of Financial Services on Retirement Income Literacy.
This survey was conducted in 2014 and found that most individuals really have limited knowledge when it comes to knowing how to plan and invest for their retirement. On the quiz that was given, less than 1% of people taking the test received an A grade, while 80% of test takers completely flunked.
There are numerous places these days where individuals can learn more about financial literacy online. However, there are few people who have the sufficient inclination, time or curiosity for actively researching this on their own. So it was surprising to see the amount of interest there was when an outsider consultant and presenter were brought in by a non-financial R&D workplace to give a few financial talks that were part of the organization’s employee work-life balance events. There was definitely commendable intent behind this – when employees feel they are valued, it tends to result in better productivity, higher morale, and stronger home and work lives.
Since the presenter was hired based on education instead of a sales push, its aim was providing employees a primer on the way investing works. One of the talks was on insurance and the other was on stock investment. So were the educational goals met by these two talks? From my perspective there were some good as well as bad points that were made, in addition to a few suggestions that were quite bewildering.
The following is the good as well as the bad in terms of what “professional” presentations and advice sound like and what you might run into if you to go to one.
Passive Indexing. Numerous market-performance studies have shown that employing a simple strategy of buying and holding passive index investments usually outperforms individual stock-picking and aggressive timing strategies. Although he did not provide examples for these scenarios or detail the reasons – i.e. efficient market hypothesis or poor investor psychology – for this audience it was a positive that the emphasis was on simple passive strategies.
Planning based on budgetary needs. Determining the amount of income you are going to need for your retirement is among the most common financial questions that are asked. He pointed out two possible approaches for this question. You could either approach it from the bottom line through basing the number on expected needs and expenses or from the top line where your current salary or income is matched. He went through a couple of individual needs example as well as some potential pitfalls that are often overlooked by people. The necessary first step is to calculate what your financial needs will be objectively and then get a plan put into place for achieving this goal.
Explanation of how insurance works. The focus of the second talk was mainly on insurance. It ranged from variable insurance to life insurance to medical insurance. Variable insurance is frequently an investment scheme that masquerades as insurance. However, over the years, the plans have become quite complicated, and sometimes on purpose. That is why it was essential to have a clear explanation on the way they work. This relates to a personal rule I have for investing: never purchase a financial product your don’t understand yourself or isn’t something you can explain to your spouse using plain language.
No discussion of fees. Although passing indexing was encouraged and discussed, there was surprisingly little talk of fees as well as the impact they can have on draining your returns. As many have pointed out, you may not be able to always control your upside returns, however controlling your downside drags is easy to do.
However, when taken within the context of this local environment, the lack of focus on it is more understandable. In Singapore, unlike in the U.S. where strong competition, discount online brokerages and low fees have resulted in the default being low cost investing, there are few to no choices in this country for inexpensive investing. To this day it is common to see things such as yearly and monthly account fees, high commissions on simple trades and 2.5% expenses on simple sector funds.
Poor asset allocation. The most bewildering advice by far that was provided had to do with investment asset allocation. Although it is an art at times and a science at others since isn’t any such thing as perfect asset allocation, there are numerous ways of having bad allocation. Rather than discussing risk, correlation and diversification, he just stated to invest in things that were growing.
It was recommended specifically to invest in just two countries – China and the U.S. The rationale for this was that China has a large, growing economy and the U.S. is the most technically innovative nation. That was it – he didn’t further explain factors such as adjusting allocation based on risk tolerance, needs or age, demographics, structural impacts or types of growth.
When considering studies like the one conducted by Ibbotson and Kaplan in 2000, which found that asset allocation was responsible for around 40% of a fund’s performance, although this is frequently misquoted as being 90%, perhaps discovering the proper allocation is the most important of all of the investment decisions you can take after making the decision to invest to begin with.
No discussion of stocks. Unlike his detailed explanation on the structure of insurance products, there was very little discussion on stocks in terms of what they are, they way they work and how they increase in value. In fact, the only stock-related information that was provided was a three-minute Blackrock video which explained what ETFs are. That was it.
It became apparent later that the work history of the presenters was with the insurance industry rather than stock investments, so this explained the omissions. So lesson to learn here is to seek to understand always, ask why and more important why not something isn’t explained.
All of the jokes. I completely get that personal finance tends to be a boring and complex topic. It isn’t surprising that an engaging talker is needed to help build up trust. Unfortunately, give that the role of the financial advisor often comes down to being a sales job, a common tactic that is used is to inject various personal anecdotes for making those trusted personal connections. So at these types of events you need to be prepared for some long stories and very bad jokes.