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View Full Version : Financial ignorance comes at a large price



junkman
4-24-11, 9:06pm
A comprehensive, scientific survey by the FINRA Investor Education Foundation revealed a stunning lack of financial acumen among Americans.

"Many respondents had difficulty with basic financial concepts and . . . only a small minority . . . were able to answer a moderately challenging question correctly," the report concluded.

Overall, fewer than 10% of more than 28,000 Americans nationwide answered all five questions correctly. Yet more than one-third assessed their financial knowledge at what the report called "the high end of the scale."

http://www.jsonline.com/business/114394674.html

What I find both amusing and sad is that the same people who launch threads asking for financial advice become so defensive of their ignorance when sound advice is actually offered to them.

Charlie

CathyA
4-24-11, 9:19pm
Thank you Charlie. I would be the ignorant one. Not all of us want to live the American dream and get caught up in all the crap that goes with it. Just because I choose to make less money with my money than you, doesn't necessarily make me ignorant.

fidgiegirl
4-24-11, 9:40pm
I was surprised by your strong reaction, CathyA.

I didn't get that impression from the article or the OP. I felt like it was talking about some largely factual concepts, except maybe the "safety" of mutual funds (even they use the quotation marks). Knowing how the whole game works is part of being able to make an independent, informed decision of whether to play or not or how to go about it. Knowing you don't want to be part of it involves having a modicum of understanding of what it even is. And since most people do aspire to play, then it's too bad they don't know how it all works.

I would have gotten the bond question wrong.

CathyA
4-24-11, 10:17pm
Fidgiegirl,
I was responding mostly to Charlie's other reply to a post of mine entitled "I'm just not a risk taker".

He appears to be a new person here and it bothers me that he comes on, telling me I'm ignorant for having the attitude I do, and implying that he knows what's best, and I'm ignorant if I don't agree.
There are so many things that factor into why a person chooses to "invest" their money in a certain way. He may have alot of different views of the world than I do. That's fine.......but don't come on here and immediately put me down for not taking the action that he (and others) might take. Like I said, making alot of money isn't always the most important thing to everyone.

He responded to my first post, then comes here and starts another one saying that he finds it "amusing but sad that people who launch threads asking for financial advice become so defensive of their ignorance when sound advice is actually offered to them."
I didn't even ask for advice. I merely stated what I was going to do.
He just introduced himself like a bull in a china shop.

razz
4-24-11, 11:44pm
Actually junkman has been around for a while in the previous SLN as well. He is knowledgeable and has shared the very points to consider which a number have been seeking.

If one posts a thread, expect to get a variety of comments, some not of one's choosing. Above all, please don't take a stranger's online comments personally. It simply is not worth the stress.

lhamo
4-24-11, 11:44pm
I think it may be best for everyone if we agree to disagree and avoid carrying insults (or words that could be perceived as insulting) and the hurt that comes from them all over the forums.

Moderators are watching this and the other related thread. Appreciate everyone's efforts to maintain a civil and respectful tone.

lhamo

lhamo
4-25-11, 12:04am
I think that one thing that may get overlooked when discussing relative knowledge about investing is that every person/family has a slightly different situation, and probably a very different tolerance for risk. Some people would look at the fact that DH and I have about 4 years of annual expenses in liquid savings and say we are being really stupid -- we could put that money in the market and earn way more than the very low levels of interest that we are currently getting. But there is a method to our madness, which is based on some of the following considerations:

1) DH's job could disappear at any minute due to factors beyond his control. If he loses his job, it may also mean that we will need to leave China quickly. It might take us some time to find new jobs, so having a large emergency fund that could carry us 3-4 years until we get re-established gives us the peace of mind we need to deal with an otherwise very stressful situation. If we didn't have that cash cushion, I would be totally stressed out, even though there is nothing I can do about DH's job situation (except encourage him to find another one, which I do regularly). As it is, I am more able to let myself be zen about it all and just see what happens.

2) A large part of our networth is tied up in our apartment, which we might need to sell quickly as well if things went sour with DH's job. Or if we didn't need to leave China we might choose to pay off the mortgage in order to lower our monthly outgo. Until things stabilize with DH's job, we are aiming to increase our liquid savings so that if we had to we could pay off the mortgage. We might not decide to do that if it came right down to it, but want to have the option.

3) As the value of the dollar started to decline, we transferred a fair amount of cash over to our Chinese currency accounts. It helps protect our buying power as the dollar drops, and if we need to change that back, we would actually get more for it than we exchanged it for. Currency speculating in a way, but it works in our favor in the long run, as does the fact that our mortgage is in dollars (and at 3.75%), because there is no way the dollar is going to move except down in relation to the renminbi.

4) We are already investing the maximum amount we can into our retirement accounts, which are well diversified, and also making regular contributions to the kids college funds. So we have plenty of money going into the market already, enough to feel comfortable with in any event.

Are we losing out be keeping so much in liquid savings? MAybe, but I agree with the post that Roger made on the other thread -- the "can I sleep at night" factor is a huge one, and may be more important in the long run than the raw return on any particular type of investment strategy. If I jump on a market rollercoaster that sends my blood pressure soaring before I am ready for it, I might make a fortune but have a heart attack before the end of the ride. That seems kind of counterproductive. Maybe better to stay in the kiddieland section with my safety belt firmly secured and enjoy both the security of a solid nest egg and the more subdued pleasures of modest returns.

lhamo

Rogar
4-25-11, 12:22am
When it comes to investing, I don't know if there is just one answer. I routinely follow the early-retirement.org forums and have for years. There seem to be a lot of seasoned and educated investors making contributions. At one time a few years ago everyone was gung ho on stocks and you were silly to be conservative. Then all of sudden people were bailing into all fixed incomes and doom and gloom on stocks. It's sort of moderated to the inbetween now. There were plenty of knowledgable people who made incorrect choices. Investing to me does include some good knowledge, but also some good intuition. I think the ones who are at risk of loosing the most are the greedy. Risk and return will always be related.

rodeosweetheart
4-25-11, 12:25am
I like your post, llamo, as it really points to how personal these decisions are, and how tied to one's circumstances. For every one of the questions referenced in the article (the ones I could find) I knew the "correct" answer, but I also knew that in my life, a financial decision using that principle might or might not be applicable--that the right answer is often a case of "it depends." I've been reading the thread about rental properties, and the thinking that the op is doing is right on the money--she wants to customize a financial decision based on her own needs, goals, and preferences, and they will vary from someone else's. Your post, llamo, shows how specific these decisions are. I personally have single stocks in my portfolio and I have mutual funds, and I buy them for different reasons, and so the "safety" of mutual funds answer is another "it depends"--I feel a whole lot safer in some of my single stocks than I do in my mutual funds!

And Cathy, I totally get where you are coming from-- I think we are saying exactly the same thing. Like you, I would rather have more control over my life and my circumstances and select how I want to arrange my financial life to fit my own goals and needs than to fit with some one size fits all template for investing. So I would rather have farm than one of those condos you see on HGTV. (Right now I have neither, but at least I knwo what I want!)

loosechickens
4-25-11, 3:06am
If only 10% of 28,000 people could answer very basic questions like that, the huge majority of people in this country are dangerously ignorant. That is very scary, Junkman. REALLY scary. Because the great majority of those people probably have some kind of retirement savings, make financial decisions about their savings regularly, yet might as well be pinning the tail on the donkey blindfolded.

Bummed me right out........ ;-(

I agree completely that there is no such things as a "one size fits all" kind of investing strategy, and personal situations, timelines, degree of risk tolerance, etc., has to be considered. But it is important for someone, when making decisions about their savings, to at least be in possession of the facts, understand both the obvious and less than obvious, but just as real risks in various investments, and make their decisions of "just depends" based on a clear understanding of what the choices are and why they are making them.

It is one thing to choose to do something that won't make you the most money because you have other considerations that are equally compelling, but quite another to choose one investment because you think it is "risk free" when it is anything but risk free, but you just don't understand the risks.

Everyone should make decisions based on their own particular needs, aims, goals, etc., but if the decisions are made emotionally, without understanding of the ramifications of those choices, or even knowing the relative risks of each, that can't be good in the long run, or even in the short run, for anyone.

Most Americans know more about characters in TV programs, or the fine points of decorating their living rooms than they do about providing for their retirements, and protecting their hard earned money. Because in the case of money management, ignorance really IS dangerous. Very dangerous. And time spent educating oneself about basic investment vehicles, the risks and rewards of each, so that a person can find the proper balance for their own comfort level based on factual knowledge, really matters.

bae
4-25-11, 3:10am
I wept when I read that article.

flowerseverywhere
4-25-11, 8:06am
not knowing the basics of investing can hurt you badly. We will all be much more responsible for our own futures as SS and pensions evaporate.

Several people we know made very poor decisions and lost a lot of money. One of DH's co-workers had his entire 401K in company stock. He has less than he has put in all these years when the stock dropped. My friend panicked when the market went down and took all of her money out of the stock market and into fixed income. Then she waited until the market was up and put it back in, the opposite of what will make you money. She isn't back to her baseline of 2008 level. If she had just left the money alone she would have been fine. Another friend is back at work after being sold a very high cost annuity he didn't understand. And yet another got involved in some gas well scheme and you guessed it, lost most of his money.

There are a few simple things that you can learn to protect yourself. Basic magazines like "money" will give you these basic rules over and over. Go to your library and read the issues as well as basic financial books. Here are some examples of what you will read over and over when you educate yourself:

1. diversify.
2. take advantage of 401K's and IRA's to the best of your ability. Especially if you have a match.
3. know what fees you have to pay
4. don't invest in anything you don't understand
5. read the fine print
6. understand that if someone manages your money, they need to get paid. Do you pay them a flat fee, or do they take a percentage of all the money you give them? Are they going to sell you products that are advantageous to you or they get a good commission from.
7. know basic terms like dollar cost averaging, asset allocation, annuities, compound interest for example.
8. If it sound too good to be true it probably is.

jp1
4-25-11, 10:58am
I found it somewhat amusing that in the original article the first question's answers would have made more sense if they'd been more than, less than, or exactly $110. $102 would have been more appropriate if the money had been in the account just one year.

"Suppose you have $100 in a savings account earning 2% interest a year. After five years, would you have more than $102, exactly $102 or less than $102?" the survey asked. (You'd have more than $102 because of the effects of compounding.)"

redfox
4-25-11, 11:54am
I think it may be best for everyone if we agree to disagree and avoid carrying insults (or words that could be perceived as insulting) and the hurt that comes from them all over the forums.

Moderators are watching this and the other related thread. Appreciate everyone's efforts to maintain a civil and respectful tone.

lhamo

Thanks for a reminder... I find myself often thinking I am being judged by someone else's words, and leaping up the Ladder of Inference. Online especially - it's hard to discern someone else's intent with communications. Hell, I get it wrong all the time with the man I've lived with for 15 years! My sis & I like to remind each other than intent (what the person hoped to say) and impact (what the listener heard & how it affects them) often have little connection.

Here's a link to this thinking tool that has been very useful in our family:

http://www.systems-thinking.org/loi/loi.htm

chanterelle
4-25-11, 12:52pm
The results for the entire FINRA study , beyond the 5 questions mentioned in the article, are on a pdf on line. They are broken down by national data, state and military families. To me, these stats are quite worrisome and do not bode well for the near or long term economic recovery.

As a country we need to figure out why Americans are so disconected from their own economic power and well being. How best should we start educating the general populace and are there any hidden benefits in keeping so many people in such a precarious position ??

I was taught the basics of banking/checking, compound interest, stocks/bonds and personal finances, basic budgeting and book keeping in NYC public grade and Jr. high school. This was in the 50's and 60's before ready-credit and cheap loans were easily available.
Do these things come into play in the state of the current situation?
Can there be a mass educating in the face of credit card advertising, student debt loads and the shrinking job market??
I think this is and vital conversation that we all need to have.

ApatheticNoMore
4-25-11, 12:59pm
Yea I've gotten burned. Held on to stocks at the wrong time etc.. Taking more college level finance courses would have saved me (because the people who had those course and were getting MBAs decided differently and turned out to be right).

Also if you are in unfamiliar financial territory I'd highly recommend consulting a tax accountant, as you probably DON'T know the tax implications of what you are doing (and unless you are also going to try to make yourself an expert in taxes - and heck if you do that you might as well get paid for it :) - you are going to get burned. This is coming from someone who has filled out there own schedule Ds and so on for many years, so I'm not stupid, just trust me if you are unfamiliar ground consult a tax expert).

flowerseverywhere
4-26-11, 12:04am
Taking more college level finance courses would have saved me (because the people who had those course and were getting MBAs decided differently and turned out to be right).



You don't need an MBA. The information is available to anyone. Even my newspaper has a Monday insert called "Moneywise" that has great articles. Your library has tons of books about investing. The internet has some great websites, for instance the bogleheads website and bankrate.com has lots of articles as well.

Your advice about consulting a tax professional is excellent. The tax code in incredibly complicated and not user friendly.

ApatheticNoMore
4-29-11, 5:10pm
Your advice about consulting a tax professional is excellent. The tax code in incredibly complicated and not user friendly.

To my shock I am finding out that even tax professionals (CPAs employed specifically in the tax preparation field) don't understand the tax code! I have had to teach them about it (and more than one CPA). This is truly shocking because I'm not a tax person, I'm just an individual doing their taxes. :( I still believe people should seek advice regarding taxes, but I am NO LONGER confident that even advice will always make one informed on taxes!

A tax code that smart individuals can't figure out themselves is already really wrong (forcing people into a position where they have to pay accountant fees just to pay their taxes is really messed up IMO). A tax code that even professionals don't fully understand is just, there is no word obscene enough for the opinion I have of a government that would produce such a monstrosity. I mean it's Kafkaesque: you just want to follow the law, but the law is so complex that noone actually understands it, so there's always a chance you will be found in violation of it ...

bae
4-29-11, 5:18pm
For a "normal" taxpayer, which parts of the tax code are particularly troublesome?

I still do my own taxes...

junkman
4-29-11, 5:38pm
Not only is filing one's own taxes easy (especially with tax prep software), but dealing with IRS audits is something an individual can do. I've settled twice with the IRS and on my own terms, not theirs, meaning I paid what I owed, not what the auditors initially said I owed. But I wasn't tried to cheat in the first place, and my records were impeccable.

The first time, in 2004, the amount in dispute was $465,000, as in, that's what they said I owed them. But once I unbundled the several hundred trades I had done that year and re-reported them line by line as they wanted to see, the final settlement was $17 dollars (or something similar). Just recently, they came after me again, this time for about $3,500. But once I re-did my return and corrected their mistakes (and mine), they settled with a zero change in more taxes owed.

My experience with the IRS is that, by and large, they are honest, decent people trying to serve the public within the training and guidelines they have received. It's when matters and numbers get outside of their expectations that misunderstandings arise which get further complicated if the return contains its fair share of the inevitable errors (in both directions, their favor and yours) one makes with complicated returns involving dozens or hundreds of transactions such as any active investor will have.

But if you can provide the documentation they are legally required to ask for and have a legal right to see, then a settlement is a straight-forward matter (even if the docs run to 236 pages, as they did in my 2004 tussle with them).

So my advice is this. Don't be belligerent. Ask what they need to see and then provide it. If a person is filing an honest return, he/she will be dealt with fairly and doesn't need a lawyer, accountant, etc. Their published rules can be deciphered and followed by "ordinary citizens". All that is required is patience, common sense, and honesty.

bae
4-29-11, 5:45pm
That has been my experience as well.

rosarugosa
4-29-11, 9:21pm
This is a great thread. You don't need to be a captain of industry to benefit from understanding basic concepts like the effects of compounding interest. I recently asked a friend show me how to send a text message on his phone (cell-free-me!) I want to not text because I don't want to, not because I don't know how.
Any financial literacy campaign in this country is up against some pretty formidable forces in terms of marketing and cultural norms. Financial literacy just isn't valued in mainstream America. Thrift is suspect.

junkman
4-30-11, 12:44am
Any financial literacy campaign in this country is up against some pretty formidable forces in terms of marketing and cultural norms.

Rosarugosa,

For an easy way to see where part of the resistance to financial education is coming from, take a look at the interview Jon Stewart does with Elizabeth Warren and how the insiders are marginalizing her efforts to achieve modest financial reforms. http://www.thedailyshow.com/watch/tue-april-26-2011/elizabeth-warren

A reform I’ve proposed before is this. To access America’s public roads, you have to prove driving skills, understand traffic laws, and buy insurance. But to access America’s public markets takes no more than proof of age and a check book. Were I running the SEC, no one would be able to open a brokerage account until they submitted to the SEC a written investment plan that both the SEC and the brokerage firm would review and accept or reject. At 10% down on the account, the client would be warned. At 20% down, the client would have to argue before a review board why he/she shouldn’t be barred from investing/trading anywhere in the US for one year. My thinking is this. If you don’t know what you are doing, then you shouldn’t be allowed to do it.

Wall Street doesn’t want a smart investing public, because it couldn’t fleece them. The investing public doesn't want to become the smart money in the game, either. (“Too much work”). So nothing is going to change except on a one-to-one basis where a parent or an uncle/aunt/grandparent who is a successful investor takes a child under their wing and shows them the ropes. My parents --may their names be for a blessing-- were very conservative investors. But how to manage money was part of our home training. Two of us four learned. Two didn't, or pretty much the luck of the draw. So, no matter how much people nod their heads in agreement saying that financial education is a good thing, maybe only half are going to listen.

Charlie

RosieTR
5-1-11, 2:18am
I remember not giving two rips about learning much about money when I was young. I knew how to balance a checkbook and how to live within my (very modest) means and that was fine. Then I got a job and it came with a required retirement contribution. There was a choice between pension and 401K style, and with the 401K there was a choice between a few different companies, each of which had a variety of choices in which to invest. Holy $$$$! I had NO idea what to do, and something like 30 days to choose. So I had to learn in a hurry, asking advice from family and friends, and also trusting my gut (this was late 90s and everyone I talked to assured me that I should put money in the stock market. It made no sense to me that "the stock market would always go up" so I held back). Finally figured out a few books to check out, dogged my way through them, and over time invested with more sophistication. I thought this was normal but then come to find out: DH just sort of guessed, then dumped all his stuff in a lifecycle fund when they came up with those, more than one friend had kept money in a money market endlessly, other friends hadn't saved anything for retirement because they "didn't think they'd live that long" (these aren't people with progressive and fatal diseases, mind you), etc. Whoa. Generally these are educated people some of whom have doctorates (!). So I can believe the study.

Anne Lee
5-1-11, 8:26am
I found it somewhat amusing that in the original article the first question's answers would have made more sense if they'd been more than, less than, or exactly $110. $102 would have been more appropriate if the money had been in the account just one year.

"Suppose you have $100 in a savings account earning 2% interest a year. After five years, would you have more than $102, exactly $102 or less than $102?" the survey asked. (You'd have more than $102 because of the effects of compounding.)"

I noticed that too. In addition to the different answers, the question should have said 2% interest a year, compounded annually. The way the question was written could theoretically include some sort of savings account that does not compound. The way banks are operating these days, I can see that day coming.

Mangano's Gold
5-14-11, 5:07pm
Hmm. I'm going to be multi-handed. On one, the proportion of people with minimal investing knowledge is probably similar to the proportion who don't know who the Vice President is, or how long it takes the earth to revolve around the sun, or what century the Civil War took place. On another, the consequences may be greater for holes in one type of knowledge than another, though that is debatable.

From a "being better off financially" standpoint most Americans would be better served by applying more qualitiative skills like thrift, discipline, and deferred gratification. If you are living paycheck-to-paycheck it doesn't really matter if you know what an inverted yield curve may mean. You don't have any money to invest!

On hand #x, I see potentially significant danger in learning too much, or better said thinking you know more than you do. Trying to beat the market isn't any more likely to work for you than it is for the pros. So why try? IMO, the optimal level of investing knowledge is pretty much just: buy a low cost mutual fund with your target retirement date and be done with it. YMMV.

kitten
5-16-11, 2:29pm
Seconding this!


Hmm. I'm going to be multi-handed. On one, the proportion of people with minimal investing knowledge is probably similar to the proportion who don't know who the Vice President is, or how long it takes the earth to revolve around the sun, or what century the Civil War took place. On another, the consequences may be greater for holes in one type of knowledge than another, though that is debatable.

From a "being better off financially" standpoint most Americans would be better served by applying more qualitiative skills like thrift, discipline, and deferred gratification. If you are living paycheck-to-paycheck it doesn't really matter if you know what an inverted yield curve may mean. You don't have any money to invest!

On hand #x, I see potentially significant danger in learning too much, or better said thinking you know more than you do. Trying to beat the market isn't any more likely to work for you than it is for the pros. So why try? IMO, the optimal level of investing knowledge is pretty much just: buy a low cost mutual fund with your target retirement date and be done with it. YMMV.

puglogic
5-19-11, 7:25pm
Wall Street doesn’t want a smart investing public, because it couldn’t fleece them. The investing public doesn't want to become the smart money in the game, either. (“Too much work”).

I tend to agree. Unfortunately, this uneducated public is also the one easily fleeced by political parties who have one agenda or another in mind. Many citizens don't know of the potential repercussions of raising or not raising the debt ceiling, for example (notice I said potential...no one fully agrees on what will happen). Yet they allow their congressfolk, who are in the business only of keeping their jobs, to "explain" the party line and then to make monumental decisions like these -- decisions which could affect billions of people worldwide. That's the part that frightens me deeply, not whether someone wishes/is willing to do the brain work to make the maximum return on their own personal investments. That's a personal decision, imho.

bow-tie
5-28-11, 2:03am
...Yet they allow their congressfolk, who are in the business only of keeping their jobs, to "explain" the party line and then to make monumental decisions like these -- decisions which could affect billions of people worldwide...

This may be off topic.. but speaking of congressfolk, aren't most of them lawyers??? Not too many accounting/finance/economics classes taught in law school. Yet these are the people entrusted with TRILLIONS of dollars every year. And compound that with general public ignorance/apathy of accounting/finance/economics to ask pointed questions and keep the politicians doing something besides getting re-elected... Have mercy. It's enough to keep me awake a night.