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Sadly, the Average Investor is Incompetent

Why financial education should be at the top of your priority list

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“U.S. retail investors lack basic financial literacy…(and) have a weak grasp of elementary financial concepts.” That’s the summary of a special report from the U.S. Securities and Exchange Commission a couple years ago.

They based their report on a few different studies, one of them coming directly from the Financial Industry Regulatory Authority (FINRA). This is the organization that serves as an overseer and watchdog for brokerage firms.

In their financial quiz they ask, here’s a simple question FINRA asked average people. “If interest rates rise, what will typically happen to bond prices? Will they rise, fall, stay the same, or is there no relationship?” Here’s the disappointing part—only 28% of the people correctly answered that bond prices would fall.

Think about it: What this one simple question shows is that of all the millions of people out there who have their money in 401(k) plans, mutual funds, and bond funds (many of which hold bonds), just a little over one in four know how interest rates affect bond prices. Even though this is just one basic question, it’s a symptom of the bigger problem facing beginning investors. Our system doesn’t give us financial education, so it’s up to each one of us to gain it for ourselves.

How big is the problem? The report goes on to say that among teachers who are tasked with teaching financial topics in our schools, fewer than 20% of them felt very competent in this role. This is how financial ignorance spreads through our society, because not even the teachers can properly help young people gain this skill and knowledge.

Nathan Dungan is the founder of Share Save Spend, a company that works with schools to encourage good money habits. In his experience and research, he gives the nation a grade of C- when it comes to teaching financial topics to our children. From my own experience speaking with people all around the country, this low grade might even be a little generous. As a result, people are uncomfortable and even afraid to manage their own investments.

When we’re in school, we are taught many things. But when you really think about it, not all knowledge is equal. In one of my books I introduced the idea of The Education Hierarchy. It’s a process to help us understand the true value of different types of knowledge. There are some things we learn in school that we might find interesting, that can certainly help us become well rounded.

One of the examples I use frequently is the experience I had in school dissecting a frog. Is this an interesting thing to learn? Possibly. Is it something I use today? No.

If I wanted to be a surgeon, I would probably want to practice on a frog first—I understand that. But we all spend a lot of time on learning or exposing ourselves to trivial things. There’s nothing wrong with learning new things, of course, but what if it comes at the expense of learning things that are vital?

I learned about igneous and sedimentary rocks in my geology class. Does that help me take care of my family? Does it help me plan my investments? Does it help me in the day-to-day topic of money?

In my experience, the topic of money and investing is very important to our family. It can help us better care for our children. It helps us prepare for the future. No matter if you’re a doctor, an entrepreneur, an accountant, a carpenter, or whatever you may be, financial knowledge and skills can help improve your life. Yet we often ignore money and investing topics, choosing to instead give our time to things that might be more entertaining.

Each of us has the responsibility to gain a solid financial education on our own. School does not give it to us. Society does not give it to us. So we must forge ahead and gain it for ourselves.

My hope is that we don’t give up on this journey. Don’t get sidetracked by different learning temptations that might be more interesting or entertaining. Until you have achieved a level of profitable proficiency managing your own money and investments, I believe the smartest thing you can do for you and your family is to educate yourself about money and investing.

Original publish date: March 30, 2018

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