On the Need for Improved Financial Literacy

The need for improved financial literacy nationwide is conventional wisdom: a simple internet search will bear that out. I challenged this in my last post because people seem to have little interest.

Although I criticized this challenge based on limited sample size, it may have some merit. People are generally uneducated about investing and they seem quite willing to let professionals do the job for them. In terms of value, financial literacy differs from functional literacy. Many people who cannot read or write have felt the squeeze over their lifetime from those around them including prospective employers. Hiring financial advisers is much more socially acceptable than functional illiterates asking others to read/write for them.

This pertains to a blog post I wrote in January where I decided it wasn’t the result of a brainwashing perpetrated on the American public by the financial industry. Rather, the decision to hire investment advisers is a delegation of duty. The cost of this delegation includes management fees and lower investment returns.

We could ask whether the real issue regards a need for improved financial literacy or a choice about how people wish to invest. I don’t think the average person has enough education to decide on the latter so perhaps it does come back to financial literacy. I could also argue that most financial professionals don’t know as evidenced by the fact that so many of them do not employ options.

In the last post I pointed out that trader education is a subset of financial literacy. One can know a lot about finance, understand the role of investment advisers, and know how to interview/select a knowledgeable adviser. Even someone educated in finance may elect not to take that next step and manage his/her own investments.

I think the basics of financial literacy aim to keep people out of a “paycheck-to-paycheck” struggle. This involves how debt works, proper budgeting, savings/interest, etc. Investment management pertains to savings above and beyond that needed for annual living expenses. Getting a large proportion of the working class to establish and maintain a rainy day fund would represent a significant move higher in terms of financial standing. Having surplus capital available for trading and investing, though, is still a whole other level.

For those in possession of surplus investment capital, financial literacy may be channeled into a business. This is what I have done in order to retire from Corporate America. The pharmacist in me would point out a similarity to the way some have turned “medical literacy” about dietary supplements into a business. Despite having no customers, I would argue that my product is supported by data whereas many claims regarding dietary supplements are baseless and invalid.