12-Step Painting

A Closer Look at Financial Literacy

12-Step Painting

Americans work hard to get ahead. When it comes to understanding what to do with their money, though, retirement experts warn that too many investors are under-educated about financial matters. 

IFA Founder and President Mark Hebner used to be one of those people. As a result, he doesn't take lightly the fact that April is designated by Congress as "National Financial Literacy Month."  

After starting a successful health care company right out of college, Hebner sold his stake at age 32. "Without giving it a second thought, I deposited that money with a big-name brokerage firm," Hebner recalled.

Not until a widowed friend asked for help in getting a handle on her finances did he come to realize how much investment management relied on speculation rather than a quantitative, evidenced-based analytical process to construct robust long-term portfolios.

As Hebner wrote in his seminal book, "Index Funds: The 12-Step Recovery Program for Active Investors," such research helped him to uncover "an ugly fact" about his own portfolio. His lack of understanding of how markets worked had cost him a substantial amount of money.

In building up a personal library that currently includes more than 2,500 financial books dating back to 1648, he reached an epiphany: "My time spent trying to beat the market had been wasted and was a very expensive lesson."

In 1999, Hebner set out to help other investors avoid making the same mistakes by creating an investment advisory firm that unlocked the "dark secret of active management" and focused on a fiduciary standard of care for its clients. His goal, he said at the time, was to "help investors replace speculation with an education." 

As a result, he views financial literacy month as an important reminder of a significant issue facing this country's investors and retirement savers. 

Research on this problem doesn't paint a pretty picture. One of the more comprehensive studies was compiled by Standard & Poor's and looked at literacy rates across the world. It found the world's largest economy ranked just 14th when measuring proportions of adults that could be considered as financially literate. "To put that into perspective: The U.S. adult financial literacy level, at 57%, is only slightly higher than that of Botswana, whose economy is 1,127% smaller."1

Much of that failure can be traced to a lack of public education. Only 21 states require high school students to take a personal finance-related course, according to the Council for Economic Education. Some 25 mandate at least one class in economics be taken.2 

Other researchers have found that parents don't spend much time, if any at all, on talking about money with their children. In a national survey of U.S. adults, just 13% reported their families talked about household finances while growing up.3 

The 2019 Penny Hoarder poll also found that 40% of those surveyed didn't keep a household budget and 23% live from paycheck-to-paycheck. An alarmingly large number of Americans questioned (40%) reported less than $1,000 in savings. "Parents will sooner talk about sex, drugs and alcohol than they would about money," one analyst noted in the report.

At IFA, we're encouraging our clients to be proactive about raising awareness of how money works with their children. Instilling a sense of basic financial literacy is likely to require a team approach, say educators. We invite you to reach out to our wealth advisors to help educate members of your family about investing and related financial issues. 

Another comprehensive resource which anyone can access for free is IFA.com. The site, which is updated with new articles and videos on a weekly basis, includes hundreds of original pieces of content -- not to mention an electronic library of classic investment books and academic papers. Also included is a wide range of investment tools such as financial calculators and a survey to help investors determine the appropriate risk capacity for their investment portfolios. 

In addition, several nonprofit educational programs provide free information about tackling literacy issues. Those include sites designed and maintained by Money Management International, Check Your School and the JumpStart Coalition for Financial Literacy

Residents in Orange County, Calif., can also take advantage of a series of free public workshops run by a local nonprofit, Financial & Estate Literacy. It offers a two-pronged financial literacy format, "It's Your Money" and "It's Your Estate." Led by Hebner, some of IFA's advisors volunteer to help educate investors as part of this program.  

The idea behind such a series, according to program leaders, is to provide investment seminars that come free of strong-armed sales pitches and conflicts of interests posed by brokers peddling stocks, bonds and insurance products. 

"I think investors really need an education about how markets work," said Hebner. "This program is unique because it only accepts sponsorship from nonprofits -- I'm not aware of any other series of estate and investment planning workshops being offered free to the public that is set up like this in Orange County."

Footnotes:

  1. InvestmentNews, "Financial Literacy: An Epic Fail in America," March 2, 2019. 
  2. The Council for Economic Education, "Economic and Personal Finance Education in our Nation's Schools: Survey of the States," 2020. 
  3. The Penny Hoarder, "Survey: Lack of Financial Literacy Means Lower Incomes, Less Savings," Sept. 25, 2019.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/