By Frank Conway
A combination of medical science and lifestyle changes has resulted in more people living longer.
At the same time, more employers have stopped offering defined benefit pensions and replaced them with defined contribution schemes. States have also changed retirement rules resulting in future retirees having to work longer before qualifying for a state pension.
This major shift of financial responsibility from both the employer and State to the individual means today’s generation must develop a much broader and deeper understanding of money if they wish to establish the four pillars of financial well-being; a ‘rainy day’ fund, buy a home, protect their family and plan for retirement.
Defining financial literacy
Broadly, financial literacy is defined as the ability to understand how money works in the world, including earning an income, saving and spending, protecting against risk, credit and debt, investing and making financial decisions.
Equally important is educating young adults on the importance of establishing a personal credit score. This can have significant life implications in housing, access to credit, employment and even car insurance premiums.
A 2013 study commissioned by the UK Money Advice Service identified children as young as age seven form life-long money habits. Separately, a 2016 study from MoneyWhizz revealed how adults struggle with important financial concepts, including inflation and compound interest.
MoneyWhizz has developed detailed financial literacy framework segmented for ages 5 – 6, 7 – 11, 12 -14 and 15 – 18. The youth framework sets out both the learning objectives and activities adults should undertake to promote financial education.
The framework is the basis for a new financial education programme from Bank of Ireland developed for kids aged 7-11. The programme uses a mix of stories, promotes critical thinking and includes quizzes and word focus. Critically, teacher / parent worksheets underpin adult / student interaction. During an initial outreach to primary schools in late January and early February, the response from schools right across Ireland has been overwhelmingly positive proving that financial education is valued and needed, even for kids as young as age 7.
A separate programme for secondary schools employs different delivery methods. Class visits and online content has been requested by about one-in-five schools across the Ireland.
Finally, when it comes to adults, there is a major appetite for knowledge, including face-to-face talks.One constant is attendees seeking answers to important money questions. Recently, a tech-savvy individual using an online ‘robo-adviser’sought clarification on the long-term impact of fees (TER/OCF) on investment performance. Despite a wealth of online sources, none answered this important question clearly.
When it comes to financial well-being, one must be informed, patient and humble. In other words, they need to learn about money, they need to plan and grow their personal wealth over time and where they may not understand specific financial issues, they MUST ask questions.
Ultimately, financial literacy empowers people to make informed financial decisions, value the benefits of financial planning,free them to ask important money questions and take greater control over their financial well-being. This is why early intervention is so important.
Frank Conway is the founder of MoneyWhizz.org, a financial literacy initiative based in Dublin, Ireland.
A report in the Irish Times today illustrates the massive appeal of ‘buying low’. It’s been a mantra of brokers for decades; the ‘you can’t lose’ argument that can be so successful at whetting the appetite of those looking for investment returns.
But ‘buying low’ can never replace buying quality, as Warren Buffett advises time and time again.
In the case of the Detroit property portfolio shambles, it would appear that some of the due diligence could have been emotionally driven and not as methodical or robust as it should have been in order protect investors.
Since the peak of 1.8 million people in the 1950’s to just over 700,000 today, Detroit has been bleeding the lifeblood that drives housing values; buyers.
The city has also bled jobs as car manufacturers shifted production to less unionised southern US states and further south into Mexico and north into Canada.
To put that in perspective, US cities where populations have grown have also seen property prices grow in tandem, including metro New York, Boston, San Francisco and Seattle.
This mix of population and employment growth is the lifeblood of investment success. To grow property prices, one must look for the right mix of conditions, not what looks like a bargain.
Lesson for investors
The stock market is the vehicle of choice for the smartest investors through time. Property is risky, clunky and when market conditions change, incredibly slow to offload from any portfolio, which means it carries too many high risk features for ordinary investors.
Add to this, the political landscape and social housing issues and property investors have become social pariahs across the globe.
This is why investments such as stocks and bonds remain so popular. They are easy to buy, easy to sell, their value is immediately understood and for those that are traded on the major exchanges, their value is immediately transparent.
Stock market investors need to look for a number of giveaways that will impact their investment growth potential, including the Total Expense Ratio (TER) also known as the Ongoing Charges Figure (OCF). They need some understanding of risk and diversification but beyond that, they should also keep in mind the relative ease of buying and selling assets, and remember to keep an eye on trading costs which will negate growth. That said, the power of the stock market for investment growth potential is significant for ordinary investors.
Property can never really match the stock market for long-term returns
Which is a pity as so many Irish investors still have a massive affinity to it. It’s retro, a condition of our culture that appears slow to change as demonstrated in the Detroit Property Fiasco, where a licensed and supposedly seasoned investment adviser got the basics of investing so wrong…and lost millions of Euro in client money in the process.
There is a growing debate as to whether Warren Buffet and mega money managers like Vanguard are right when they discuss investing strategies.
And in case you might have missed that debate, the central issue is fees.
Passive investing supporters like Buffet and Vanguard founder, Jack Bogle argue that there is no benefit to the investing public when it comes to paying too much money over to ‘active’ investors. Those are the guys that spend a lot of their time buying and selling stocks and bonds in order to ‘beat’ the market and generate a higher rate of return to their customers.
Bogle and Buffet believe it is more profitable to take a less active approach, a passive approach. They argue that it is impossible to beat the market long-term and those that do only do so for a very short period of time, their luck runs out and over time, their rapid fire buy-sell approach actually costs investors huge sums of money unnecessarily.
For Buffet and Bogle, the math is overwhelmingly in their favour.
When I talk to investors and students, explaining the concept of active and passive investing can be a little daunting. At first, I tried to simply present the maths and while this worked in offering the science, it didn’t fullyy explain the real difference between the different approaches.
While out on a run, I experienced the difference.
It was about 7pm and traffic was heavy.
What I noticed was that I was getting to the next set of lights at the same time as two particular cars. This lasted for just two sets of lights. And this reminded me of another driving experience through Manhattan a few years ago. Provided you drive at a particular rate of speed, it is possible to hit a majority of green lights all the way from lower Manhattan to the top end of the island. This is passive investing.
When I did that drive across Manhattan, I noticed another car that sped from light to light. It got caught at every red light. And at the end of the cross-island drive, I was still next to it. The other driver was active investing; speed, spurts and stops and along the way, getting no further, using more fuel and probably risking a speeding ticket.
For some investors, there can be a certain romance in the concept of the Wall Street type adviser. But like that driver that dashed from light to light, they are usually more sizzle than substance.
When it comes to growing your money there are many investment options to consider. But when it comes to investing approaches, there are only two; active or passive.
The maths support a passive approach all day for the sheer size of the investment return potential over time.
At the end of the day, this is broadly the better option to securing more long term wealth growth…and putting money in your investment account (including pensions).
Frank Conway is a Qualified Financial Adviser and Founder of the MoneyWhizz, the financial literacy initiative