Larry Swedroe: Financial Illiteracy’s High Cost

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Random Walker
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Larry Swedroe: Financial Illiteracy’s High Cost

Post by Random Walker » Mon Jun 04, 2018 9:15 am

http://www.etf.com/sections/index-inves ... -high-cost

Larry reviews the tragic lack of financial education and literacy in our society. He provides some statistics that support this thesis and then goes on to review a study that looked at the relationship between investor results and financial literacy. Looks to me that in the big picture us Bogleheads are relatively literate financially. I especially recommend this article for anyone who has questioned Larry’s motives in the past.

Dave

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by oldzey » Mon Jun 04, 2018 10:48 am

Thanks for sharing, Random Walker.

I look forward to Larry's 17th book that he has authored or co-authored on investing: "Your Complete Guide to a Safe and Secure Retirement."

Cheers,
oldzey
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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by FreeAtLast » Mon Jun 04, 2018 10:59 am

What is a "unit of financial literacy?" I am unable to access the academic paper that Larry references.
Illegitimi non carborundum.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by JoeRetire » Mon Jun 04, 2018 11:00 am

I agree with this part:

"But perhaps the bigger tragedy is that so many apparently would rather watch some reality TV show than “invest” the time and effort to become financially literate."

I'm not sure that any of Larry's books will help that.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by oldzey » Mon Jun 04, 2018 11:08 am

FreeAtLast wrote:
Mon Jun 04, 2018 10:59 am
What is a "unit of financial literacy?" I am unable to access the academic paper that Larry references.
Here's a link to a working copy of the paper: https://www.tse-fr.eu/sites/default/fil ... se_808.pdf
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by edgeagg » Mon Jun 04, 2018 11:55 am

Here are the questions that gauge literacy:
==
Financial Literacy
The variable Financial Literacy equals the number of correct answers to
the following questions:
1) Suppose that you have 1000 Euro in a savings account that offers a return
of 2% per year. After five years, assuming that you have not touched your
initial deposit, how much would you own? a) Less than 1100E; b)
Exactly 1100E; c) More than 1100E; d) I don't know.
2) Livret A are used to finance social housing.
3) In 2008, the value of the CAC 40 Index of the largest listed companies
decreased by more than 50%.
4) The value of the CAC 40 Index increased during 2009.
5) A share gives the right to fixed revenue.
6) Assurance vie contracts benefit from special fiscal treatment.
7) 40 divided by one-half, plus 10 equals 30.

==
Amazingly, the answer to (7) was 38%, which boggles the mind.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Ari » Mon Jun 04, 2018 12:21 pm

edgeagg wrote:
Mon Jun 04, 2018 11:55 am
Here are the questions that gauge literacy:
==
Financial Literacy
The variable Financial Literacy equals the number of correct answers to
the following questions:
1) Suppose that you have 1000 Euro in a savings account that offers a return
of 2% per year. After five years, assuming that you have not touched your
initial deposit, how much would you own? a) Less than 1100E; b)
Exactly 1100E; c) More than 1100E; d) I don't know.
2) Livret A are used to finance social housing.
3) In 2008, the value of the CAC 40 Index of the largest listed companies
decreased by more than 50%.
4) The value of the CAC 40 Index increased during 2009.
5) A share gives the right to fixed revenue.
6) Assurance vie contracts benefit from special fiscal treatment.
7) 40 divided by one-half, plus 10 equals 30.
Those were difficult! I can't say I know what my local large-cap index (OMXS30) did in 2008. Did it dip more than 50%? Dunno. Did it increase in 2009? Dunno. I wasn't investing during that time.
Amazingly, the answer to (7) was 38%, which boggles the mind.
Is the answer "No, it equals 90"? 40 divided by a half is 80, plus 10 is 90. Sounds like a badly worded question to me.

EDIT: Looked at the study and hoped they'd provide the original questions in French, but they did not. That makes it a lot harder to evaluate how the questions were worded.
Last edited by Ari on Mon Jun 04, 2018 12:31 pm, edited 1 time in total.
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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Ari » Mon Jun 04, 2018 12:24 pm

Regarding the study, I found it interesting that the more financially literate were more active in their investments, changing their allocations more, and also got better returns, than the less financially literate, who generally stayed put in their investments. And the more literate did not have more aggressive portfolios.

(Larry's summary) didn't say anything about fees, though. I suspect the less financially literate had higher fees.
All in, all the time.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by PVW » Mon Jun 04, 2018 12:48 pm

I agree with this statement: "The fact that our educational system has failed to provide much of the public with what I would consider even a basic level of financial literacy certainly is a tragedy."

I don't support this statement: "But perhaps the bigger tragedy is that so many apparently would rather watch some reality TV show than “invest” the time and effort to become financially literate."

Blaming the student is oversimplifying the problem. Mocking their entertainment choices doesn't help make your case.

Making financial literacy courses part of compulsory education would be a benefit to society. But changing that curriculum is a pretty high hurdle - there is a large amount of inertia and many competing topics. Another path is through self education. This is easier but still a pretty high hurdle. Financially illiterate or uninterested people tend to follow the herd or stick their head in the sand. I don't know how to convince them that financial literacy is important.

There is money to be made from people that are financially illiterate. The financial advice industry is responsible for a lot of misinformation and they perpetuate the idea that investing should be left to the professionals. Capitalism is a big driver of social culture and I'm sure there is a negative correlation between the motivation for financial education and the revenue in financial advice.

It doesn't have to be this way. There is probably more money to be had in financial advice if they would quit making investing seem too difficult. Make it easy, convince more people to save money, quit ripping people off. Given the small percentage of people that are saving enough for retirement, even a modest percentage increase would yield great rewards for the financial advice industry. Align their profit motive with educating the public and I'm pretty sure financial literacy will improve.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Grt2bOutdoors » Mon Jun 04, 2018 12:57 pm

PVW wrote:
Mon Jun 04, 2018 12:48 pm
I agree with this statement: "The fact that our educational system has failed to provide much of the public with what I would consider even a basic level of financial literacy certainly is a tragedy."

I don't support this statement: "But perhaps the bigger tragedy is that so many apparently would rather watch some reality TV show than “invest” the time and effort to become financially literate."

Blaming the student is oversimplifying the problem. Mocking their entertainment choices doesn't help make your case.
You could insert words like " know current events" "exercise" "eat properly" "world history" "who is the President of the United States or who is your local US Senator representing your state" in place of the word "invest", the truth still remains, most individuals would rather spend their time on things or items that have no real value to one's life.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by willthrill81 » Mon Jun 04, 2018 2:46 pm

Start the countdown to the thread being locked.

I think it's safe to safe that financial illiteracy will likely cost the average American consumer hundreds of thousands of dollars, perhaps more, over the cost of their lives and even more importantly result in them not being able to get nearly as much out of life as they could otherwise.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by edgeagg » Mon Jun 04, 2018 4:56 pm

I think that while we would like people to become financially literate, it isn't an easy thing to do. IMO there is no prescriptive mechanism to become literate at a specific age. For example: I have a 7 year old. Is there a prescriptive path to put him on the path to financial literacy that is known to be successful? Namely, a "recipe" of things to do that are "known to work"? That is to say, a back tested curriculum that I can refer to as my son passes through different stages of life (age).

If we had something like this, even if it wasn't taught in school, the large megaphone of Bogleheads could work wonders. If folks are interested in putting "recipes" of this form together, PM me and we can see if we can work something out that we can post (for instance) on the wiki.
ea

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by fortyofforty » Mon Jun 04, 2018 5:49 pm

Random Walker wrote:
Mon Jun 04, 2018 9:15 am
http://www.etf.com/sections/index-inves ... -high-cost

Larry reviews the tragic lack of financial education and literacy in our society. He provides some statistics that support this thesis and then goes on to review a study that looked at the relationship between investor results and financial literacy. Looks to me that in the big picture us Bogleheads are relatively literate financially. I especially recommend this article for anyone who has questioned Larry’s motives in the past.

Dave
oldzey wrote:
Mon Jun 04, 2018 10:48 am
Thanks for sharing, Random Walker.

I look forward to Larry's 17th book that he has authored or co-authored on investing: "Your Complete Guide to a Safe and Secure Retirement."

Cheers,
oldzey
My only objection is how certain some appear to be about the unknowable. Admitting a degree of uncertainty goes a long way towards achieving financial literacy, in my opinion.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

Random Walker
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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Random Walker » Mon Jun 04, 2018 6:28 pm

Who is appearing certain about the unknowable?

Dave

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by fortyofforty » Tue Jun 05, 2018 9:37 am

If you haven't seen it for yourself, I can't help you.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

Random Walker
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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Random Walker » Tue Jun 05, 2018 10:15 am

Forty forty,
If you are talking about me, don’t understand at all how you can accuse me of being certain about something unknowable. I’ve promoted diversifying across factors and sources of return because I have no clue which factors will perform well and when. One of the reasons I use an advisor is that I know there is stuff I don’t know. The ruthlessly efficient markets will always surprise and humble most all of us. There’s an awful lot I’m not certain about. I am certain though, that if that is your characterization of me, then you’re wrong.

Dave

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by lukestuckenhymer » Tue Jun 05, 2018 11:59 am

Even with providing financial literacy, there are more broad concepts that are difficult to permeate some brains: The risk/reward nature of investing, how it is different from gambling, investing over the long term and getting away from the need of "instant gratification." This has been the most difficult part of trying to bring my girlfriend and her family away from the dark side of scratch tickets being the only gateway to financial independence. I've taught them about the basics of economics and finance, but still the animal instincts of instant gratification and blowing your money on frivolities are nearly impossible to shake off. But Lord help me, I'm trying.

JoeRetire
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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by JoeRetire » Tue Jun 05, 2018 12:17 pm

fortyofforty wrote:
Tue Jun 05, 2018 9:37 am
If you haven't seen it for yourself, I can't help you.
You have to use your third eye...

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by JoeRetire » Tue Jun 05, 2018 12:20 pm

Random Walker wrote:
Tue Jun 05, 2018 10:15 am
One of the reasons I use an advisor is that I know there is stuff I don’t know.
That's smart.

There are things we know, things we know we don't know, and things we don't know that we don't know.
Advisers can help with all three.

Random Walker
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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Random Walker » Tue Jun 05, 2018 12:54 pm

JoeRetire wrote:
Tue Jun 05, 2018 12:20 pm
Random Walker wrote:
Tue Jun 05, 2018 10:15 am
One of the reasons I use an advisor is that I know there is stuff I don’t know.
That's smart.

There are things we know, things we know we don't know, and things we don't know that we don't know.
Advisers can help with all three.
And the stuff that really gets us in trouble is “the stuff we know that ain’t so!”

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by 2comma » Tue Jun 05, 2018 1:02 pm

PVW wrote:
Mon Jun 04, 2018 12:48 pm

Making financial literacy courses part of compulsory education would be a benefit to society. But changing that curriculum is a pretty high hurdle - there is a large amount of inertia and many competing topics. Another path is through self education. This is easier but still a pretty high hurdle. Financially illiterate or uninterested people tend to follow the herd or stick their head in the sand. I don't know how to convince them that financial literacy is important.
I recall an NPR podcast where they interviewed a classroom where they were teaching "financial literacy". The teacher had the students pick and follow a stock throughout the school year. :oops:
If I am stupid I will pay.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by alpine_boglehead » Tue Jun 05, 2018 1:15 pm

JoeRetire wrote:
Tue Jun 05, 2018 12:20 pm
Random Walker wrote:
Tue Jun 05, 2018 10:15 am
One of the reasons I use an advisor is that I know there is stuff I don’t know.
That's smart.

There are things we know, things we know we don't know, and things we don't know that we don't know.
Advisers can help with all three.
As can the bogleheads :)
We can only hope that there's not too much unreflected groupthink going on ...

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by alpine_boglehead » Tue Jun 05, 2018 1:25 pm

2comma wrote:
Tue Jun 05, 2018 1:02 pm
PVW wrote:
Mon Jun 04, 2018 12:48 pm

Making financial literacy courses part of compulsory education would be a benefit to society. But changing that curriculum is a pretty high hurdle - there is a large amount of inertia and many competing topics. Another path is through self education. This is easier but still a pretty high hurdle. Financially illiterate or uninterested people tend to follow the herd or stick their head in the sand. I don't know how to convince them that financial literacy is important.
I recall an NPR podcast where they interviewed a classroom where they were teaching "financial literacy". The teacher had the students pick and follow a stock throughout the school year. :oops:
Same here, local banks organize stock-picking competitions for pupils/teenagers. The big problem with getting people "financially literate" is about who controls the curriculum. Imagine Edward Jones advisers (or your favorite person with a conflict of interest) teaching courses for financial literacy :twisted:

Thank god there's also the "good guys" (like Larry) who write books, blogs and articles, hold courses, etc - the beginning of my journey to low-cost index funds was a book by Tony Robbins. And I guess the bogleheads, through this site, other publications, and personal intervention, have already saved others huge amounts of money.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by fortyofforty » Tue Jun 05, 2018 2:40 pm

Random Walker wrote:
Tue Jun 05, 2018 10:15 am
Forty forty,
If you are talking about me, don’t understand at all how you can accuse me of being certain about something unknowable. I’ve promoted diversifying across factors and sources of return because I have no clue which factors will perform well and when. One of the reasons I use an advisor is that I know there is stuff I don’t know. The ruthlessly efficient markets will always surprise and humble most all of us. There’s an awful lot I’m not certain about. I am certain though, that if that is your characterization of me, then you’re wrong.

Dave
I was not talking about you.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by fortyofforty » Tue Jun 05, 2018 2:42 pm

JoeRetire wrote:
Tue Jun 05, 2018 12:17 pm
fortyofforty wrote:
Tue Jun 05, 2018 9:37 am
If you haven't seen it for yourself, I can't help you.
You have to use your third eye...
Only need two. And reading comprehension. Might escape some, though.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Lauretta » Tue Jun 05, 2018 3:18 pm

This finding:
There was no evidence that, overall, households with higher financial literacy choose riskier portfolios. Instead, their risk exposure varies systematically with market conditions, allocating more to risky assets when they have higher expected returns. A 1% increase in the expected excess return of risky funds was associated with a 2% increase in the risky share for each unit of financial literacy.
would seem to imply that financially literate people are market timers (I guess using valuations - since I imagine expected returns of equities are determined on the basis of starting valuations(?) - I haven't read the paper yet though).
When everyone is thinking the same, no one is thinking at all

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Dead Man Walking » Tue Jun 05, 2018 9:38 pm

The public school curriculum often offers academic options geared either toward college prep or vocational training. Neither of them actually offer courses in financial literacy. I doubt that most high school seniors would retain the information that a financial literacy course would provide; however, they may remember that such information exists and seek that knowledge when it became important. Perhaps the instructor would mention Bogleheads as a good source of information.

DMW

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by Polenta » Tue Jun 05, 2018 11:40 pm

Financial Literacy or Personal Finance, call it what you may is required in high schools in some states. I know for fact that Virginia requires all students to take the class if they wish to graduate. They must also pass a personal finance final national standardized test in order to get that diploma.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by alpine_boglehead » Tue Jun 05, 2018 11:57 pm

Lauretta wrote:
Tue Jun 05, 2018 3:18 pm
This finding:
There was no evidence that, overall, households with higher financial literacy choose riskier portfolios. Instead, their risk exposure varies systematically with market conditions, allocating more to risky assets when they have higher expected returns. A 1% increase in the expected excess return of risky funds was associated with a 2% increase in the risky share for each unit of financial literacy.
would seem to imply that financially literate people are market timers (I guess using valuations - since I imagine expected returns of equities are determined on the basis of starting valuations(?) - I haven't read the paper yet though).
It might also just be indicative of financial literates using asset allocation :) (i.e. rebalancing into risky assets when prices fall), as the following paragraph mentions. The question then would be, how much do they (on average) just rebalance, or use "tactical asset allocation" to react to valuations.
Decomposing the observed changes in the risky share over time into active changes due to portfolio rebalancing and passive changes induced by differential returns to risky versus riskless funds, Bianchi found that passive changes were relatively more important for less sophisticated households
and
More literate households were more likely to act as contrarians. Rebalancing, they tended to move their wealth toward funds that had experienced relatively lower returns in the past.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by gmaynardkrebs » Wed Jun 06, 2018 10:59 am

The best explanation for financial illiteracy (HT: Zimmie):

"When you ain't got nothin', you got nothin' to lose."

Most people don't have two nickels to be literate about.

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Re: Larry Swedroe: Financial Illiteracy’s High Cost

Post by PVW » Fri Jun 08, 2018 11:07 am

Polenta wrote:
Tue Jun 05, 2018 11:40 pm
Financial Literacy or Personal Finance, call it what you may is required in high schools in some states. I know for fact that Virginia requires all students to take the class if they wish to graduate. They must also pass a personal finance final national standardized test in order to get that diploma.
e.g., https://dese.mo.gov/college-career-read ... al-finance

Excellent. I was not aware of this.

http://www.businessinsider.com/high-sch ... nce-2015-4

So it looks like the education system is starting to do their part.

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