Thursday, May 26, 2016

Financial illiteracy in the press and in society as a whole

While Ottawa east opinion writer Brynna Leslie belittles the importance of financial literacy, she exemplifies it in her opinion piece. It is clear she has not sought any professional advice, nor did the CBC Radio economics reporter she refers to. If they had, they might have learned some of the following basic financial principles.

She likely would have learned that you don't "make some good money in interest." Interest is a payment in return for borrowing your money and interest is normally a part of what is left over after the borrower has made a profit using your money. The source of wealth creation is ownership of the means of production, meaning businesses, companies, shares, stocks or whatever name you prefer to give them. With financial literacy she certainly would not have labeled the source of all wealth as "junk."

She could have learned how important it is to match the time horizon of an investment with a suitable investment type. Earning interest through a bank is suitable for short term goals because there is little fluctuation, but is spectacularly unsuitable for longer term goals because of the inherently lower returns of fixed income investments, especially one inflation is subtracted.

She could have discussed how growth investments fluctuate, but with diversification and prudence the probability of a negative outcome decreases exponentially with time. An advisor would have shown her how important it is to have patience and to understand the fluctuating nature of investment markets and coached her to avoid making mistakes of timing and selection.

With advice, she would have understood the difference between saving and investing, earning interest versus earning profits, and thus embraced the crucial incentive to save and invest - the pursuit of wealth accumulation and creation through rational self-interest.

If she was financially literate or rational enough to seek help from a financial advisor, the economics reporter Leslie refers to would have never dared advise her own daughter to "blow her pocket money on Cheezies" instead of learning about investing and personal financial independence, then reported it to the world.

The state of financial education in our schools is nothing less than a travesty and a moral outrage - testimony to the awful result of government monopolies.  Ask yourself the same question I do when I start a conversation about finance with someone I know little about: "in your primary, secondary, college and university education, how many minutes of instruction were dedicated to the understanding of critical, real-world personal financial principles?"  The usual answer is... zero.

What percentage of high school graduates are not only expected, but required by law to file annual income tax returns once they have their first job, which is usually before graduating from high school?  100%.  What percentage of these graduates is even remotely familiar with the structure and principles behind income tax? The answer is scary - for all of society.

Brynna Leslie's column is testament to the failure of our education system to prepare students for reality and the failure of our society to value financial education. Until such time as the subject is embraced (and even more so if it ever is), financial advisors provide an essential service to their clients and create enormous value in society.