Functional Financial Illiteracy
We can all agree that it’s important to understand your finances, to be smart about your investments. It seems most people, however, are not knowledgeable about finances or investing, at least according to surveys and polls. One study published in December 2006 states: “Our review reveals that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions.” (emphasis added)
You simply can’t ask What Next without some level of financial literacy.
The media seems to work hard to educate and inform us. Money Magazine, Smart Money Magazine, Marketwatch.com, and CNBC are read or watched by millions but can they be trusted, are they really educational? When the headlines and magazine covers say things like “Top Mutual Funds for This Year” or “What the Market Will do Next,” they cannot be trusted because no one can predict these things accurately. When CNBC holds a “Million Dollar Portfolio Challenge” and rings the closing bell of the stock market to promote their casinoization of investing they lose any credibility they had.
The language of investing perpetuates the gambling myth. A stock that does well is called a “winner,” an investment recommendation is called a “hot tip” as if it were a horse running in the third race at the track. No wonder planning for the future is called the “retirement game.” The stock market, investing in general, is not a game where, if the “player” gets lucky, he can beat the house.
Asking What Next takes a much different approach to investing. It’s systematic, researched, and individual and recognizes that it’s folly to attempt to do better than “the market” when the market is made up of people all trying to do the same thing. For me, educating myself meant pursuing a career change into financial planning. That was a bit extreme. For most people, seeking the advice of a financial coach or planner would suffice.
Asking What Next is only the first step. Understanding What Next requires work.
Many people making financial decisions are functional yet financially illiterate. A recent article in Marketwatch points to a study proving this and shows that even financial education isn’t enough. “In a recent study,” the article says, “participants in a financial-literacy course were tested six months after completion of the course. Their objective financial knowledge was no higher than before the course; the concepts had faded.” Even worse than this, however, is that they thought they knew more than they really did. “But their subjective knowledge, their sense of how much they knew, remained consistently higher.”
It’s time to change that. Let’s stop treating investing like a game by avoiding the “Million Dollar Portfolio Challenge” and individual stocks. Let’s stop thinking we can beat the market. If educating yourself isn’t working, seek out the help you truly need.
To begin learning more, check out The Coffeehouse Investor both the book and the website. Of course there’s always my book What Next A Proactive Approach to Success — I’m kind of partial to that one (also available as an eBook).
A big part of What Next is taking action. Will you check out any of the above suggestions?
