This blog is designed to record the investment journey of a UK based small investor. I hope to make a modest contribution to the collective wealth of investing knowledge made freely available to ordinary people. I am the author of four books [see sidebar and books tab]
Financial Literacy - A Problem for the Many Not the Few
can be little doubt than many ordinary people struggle to deal with issues of
personal finance and particularly such matters as pensions and equity
investments. On the few occasions I discuss these issues with friends and relations
it seems the subject matter quickly moves on to less challenging topics.
However, just because personal finance is not widely discussed or understood,
does not mean it is not important".
opening lines to my book 'DIY Simple Investing'
In March 2014 two American economists, Annemarie
Lusardi and Olivia Mitchell published their research (pdf) on the subject of
financial literacy. They conducted a 3
question survey to see how much respondents understood interest, inflation and
Here are the questions :
Suppose you have $100 in a savings
account and the interest rate was 2% per
year. After five years, how much do you think you would have in the account if
you left the money to grow?
A. More than $102
B. Exactly $102
C. Less than $102
D. I don't know
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you
be able to buy with the money in this account?
A. More than today
B. Exactly the same as today
C. Less than today
D. I don't know
Do you think the following statement is true or false: Buying a single company stock usually provides a
safer return than a stock mutual fund?
This was a global survey and the results revealed
a surprising level of financial illiteracy all around the world.
Only 3 out of 10 people answered all three
questions correctly in the US. In Europe, the best performing respondents were the Germans (53% got a perfect score)
and the Swiss (50%), but this still leaves almost half of each country’s
population without a basic understanding of very basic financial matters. In
countries with relatively strong economies, the numbers are sobering: 79% of
Swedes, 75% of Italians, 73% of Japanese, and 69% of French could not respond
correctly to all three questions. The score for Russia was a 96% fail rate!
Unfortunately the study does not provide results for the UK.
Whilst men outperformed women on the
finance quiz, greater numbers of women responded that they “don’t know,” a
result that held true all over the world. The upshot is that women, more
conscious of their limitations, are more likely to be interested in
This lack of
education appears to be taking a toll - half of all Americans have
nothing saved for retirement, just
one third of all adults in the U.S. have only several hundred
dollars in a savings account and
61% report that they don't have sufficient rainy day savings to cover six months' worth of essential
Does It Matter?
involves the ability to make informed decisions which are integral to our
everyday lives - how a bank account works, how to save, how a mortgage works
and how to avoid debt. People who lack the basic ability to negotiate the basic
financial landscape will be at much higher risk of falling prey to the
unscrupulous system which snares the unwary into a spiral of unsuitable
financial transactions and which result in high levels of unaffordable debt.
People with low
levels of financial literacy are likely to borrow more on credit, and tend to
pay off the minimum each month. They are unlikely to save let alone invest and
will have little or no provision by way of pension for retirement.
increasingly what we are seeing not just here but in all parts of the world. In
a study undertaken by the OECD in 2016 (pdf).
Financial knowledge is an important component of
financial literacy for individuals, to help them compare financial products and
services and make appropriate, well-informed financial decisions. A basic
knowledge of financial concepts, and the ability to apply numeracy skills in a
financial context, ensures that consumers can act autonomously to manage their
financial matters and react to news and events that may have implications for
their financial well-being. The literature indicates that higher levels of
financial knowledge are associated with positive outcomes, such as stock market
participation and planning for retirement, as well as a reduction in negative
outcomes such as debt accumulation.
Thirty countries and economies, including 17 OECD
countries, participated in this international survey of financial literacy; In
total, 51,650 adults aged 18 to 79 were interviewed using the same core
The UK came 15th overall, just ahead of Thailand
and Albania and below the average for all countries in the study.
The survey results indicate that :
The average score across all participating
countries is just 13.2 out of a possible 21 (a combination of a maximum of 7
for knowledge, 9 for behaviour and 5 for attitudes), and 13.7 across participating
OECD countries, showing significant room for improvement.
On average, just 56% of adults across
participating countries and economies achieved a score of at least five out of
seven (considered to be the minimum target score)
Fewer than one in two achieved such a score in 11
of the participating countries (South Africa, Malaysia, British Virgin Islands,
Belarus, Thailand, Albania, Russian Federation, Croatia, Jordan, United Kingdom
and Brazil). However, in stark contrast, over four out of every five (84%)
adults in Hong Kong, China achieved the minimum target score.
Across all participating countries and economies,
two in five respondents had not saved in the last 12 months.
The weakest areas of financial behaviour across
these measures appear to be related to budgeting, planning ahead, choosing
products and using independent advice.
Interestingly, relatively few people are choosing
new financial products with the aid of independent information or advice –
including best buy tables – indicating that more could be done to guide
consumers towards unbiased sources of information.
Financial resilience and long-term planning could
be further promoted through
user-friendly budgeting tools and ways of
monitoring income and expenditure which could encourage more adults to create a
household budget and use realtime data to make necessary changes before falling
People may also need education and guidance to
identify realistic alternatives to borrowing when income is insufficient to
make ends meet.
Education that applies behavioural insights, such
as encouraging people to set goals and commit to them, could also help people
to behave in more financially literate ways, including active savings behaviour
and longer-term planning.
Maybe it's not such a big problem if most of us
cannot work out the better value between a 4 pack and nine pack of loo rolls in
the supermarket. Some people who are not so good with finances will be good at
other aspects of life and can get by with a little help from their partner or
However it matters a lot if people are conned out
of life savings because they lacked a basic understanding of how the system
works, or end up borrowing more than they can afford to pay back because they cannot understand APR, or opted out of a workplace pension because some guy down the pub gave them dodgy advice.
This year, personal consumer credit lending passed £200 billion in the UK.
I have been writing this blog for close on five
years and I have written and self-published four books. I suspect that, whilst
aiming to reach a broad audience of would-be investors, in reality I am just
scratching the surface or finding a small audience of readers who are already
well versed in the dark arts of personal finance. There may well be a very
large section of the general public, probably well over 50% who cannot
understand simple personal finances and therefore cannot access the basic
information. They may never be in a position to implement a savings plan or
monitor their income and expenses let alone set up a basic DIY investment
Leave a comment below if you have any thoughts on
the state of financial literacy.