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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Wed Dec 17, 2008 10:08 am Post subject: Most Canadians economically illiterate |
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http://www.financialpost.com/working/story.html?id=1078743
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OTTAWA - Most Canadians feel ill-equipped to make economic decisions with more than half not knowing if their mutual funds are insured and with four in 10 unable to do basic interest-rate calculations.
In fact, only 13% knew that mutual-fund investments are not insured against loss, with 63% not knowing and 10% saying 75% of such investments were insured.
Those are among the "troubling" findings of a survey conducted late last summer and early fall, just prior to the eruption of the current financial crisis that helped push the economy into recession.
"When you have four in 10 Canadians who can't calculate 8% interest on $1,000, and over 60% who do not know if their mutual funds held at financial institutions are insured, you're talking about a crisis of economic illiteracy," said Gary Rabbior, president of the non-profit Canadian Foundation for Economic Education, which sponsored the survey by polling firm The Strategic Counsel.
"The poll also shows some troubling knowledge gaps among Canadians in basic areas of economic knowledge, such as credit-card interest rates and filling out tax returns," the report said, adding that 55% do not have confidence in their ability to decide among political parties' economic policies.
Those surveyed were asked 13 multiple choice and nine open-ended economic and financial questions.
On the nine open-ended questions, the average number of correct answers given was just two, and only 4% answered more than four correctly, with a third able to answer only one correctly.
On the 13 multiple-choice questions, 10% of those queried got 11 answers correct, 34% got nine or 10, while 28% scored seven or eight. Twenty per cent got six or less.
"The good news is that Canadians know what they don't know when it comes to the economy, and they want to do something about it," said Mr. Rabbior, citing findings that nine out of 10 favour making financial economic education compulsory in the public school system. |
For years now financial pundits have been celebrating the 'democratization of markets'. Average people were investing in stock markets and taking ownership of the economy etc etc. This is not a good thing, in my opinion. Most people (the majority, it seems) are not able to make informed, rational decisions with their money. This may seem merely academic, until people start dumping their retirement funds into a sinking ship.
http://www.nationalpost.com/story.html?id=1063100
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Their finances were in solid enough shape that the banker approved an investment loan on the spot. Jamie put two-thirds of the borrowed $60,000 into a U.S. exchange-traded fund. Seeking the supposed safety of diversification, he invested the remaining one-third in an international large-cap ETF.
As summer gave way to autumn, the financial newspapers were filled with dire retrospectives about past stock market crashes that had occurred during the month of October. From the Crash of '29 to the significant correction of 1987, it was white-knuckle time.
Jamie was particularly nervous about borrowing his leveraged loan in the teeth of what now appeared to be a vicious bear market. He began to have second thoughts about his rash move, but as the markets slipped, there was little he could do about it.
Sure enough, on the Monday before the month ended, the Dow Jones industrial average plunged 30%, taking all global stock markets down with it. Over breakfast the next morning, Sheena pointed to the front-page headlines.
"Are we affected?" she asked. Jamie had hoped to surprise her when his leveraged loan paid off and he parlayed the profits into real estate. Now he had to 'fess up.
"Sure, everyone's affected," he said, trying to appear nonchalant. "Big pension funds, small investors, just about anyone who doesn't have all his money hidden away in a mattress."
"Or who was shorting the market," Sheena said.
"Right," Jamie squirmed. "I didn't know you were such a sophisticated investor." The cereal tasted like dust in his dry mouth. He winked at Marcello, who was wolfing down his cereal, seemingly oblivious to its bland taste. "Where's your sister this morning?"
"Sleepover," Marcello grunted. "Sorry dad, got to run. Soccer practice."
"Need a lift?"
"It's OK. Frank's dad is taking us."
Jamie nodded. When Marcello was out of earshot, he sighed.
Sheena picked up from where she'd left off. "I was saying, I'm not such a naive investor as you seem to think. Remember that dinner at Theo's cottage, when we told him we'd reached his $250,000 minimum asset level?"
"Of course," Jamie said. "Big day."
"Remember him telling us about hedging our portfolio, reverse index funds and reverse ETFs? They go up when the market goes down, in some cases by a factor of two."
"I know that, but that also means they go down when the market goes up. I've always believed stocks go up two-thirds of the time, so why bet against them falling?"
"Well, they just did. At least we weren't leveraged."
"Um," Jamie reddened. "Actually we were." He glanced again at the newspaper that Sheena had placed on the breakfast table.
Sheena looked concerned.
"We were leveraged?" she said. "News to me. When did this happen?"
"A few weeks ago, after I met with Theo."
"He agreed to it?"
"Not exactly," Jamie said, sheepishly. "He said he wouldn't do it himself, but I was a big boy now."
"Hope it wasn't much. Conservative leverage, right?" Sheena stared at her husband of 20 years.
He took another bite and sipped his coffee.
"It wasn't nothing, Sheena, I won't lie to you."
She raised her eyebrows.
"Sixty grand," he said.
"Come again?"
"$60,000."
"Did you say sixty-thousand dollars of our hard-earned money?"
"Not precisely. Since we borrowed it, technically we haven't earned it yet."
"So we have to keep paying into it? We're back in debt?"
"For four years, yes. That's the way these things work."
"I can't believe you could be so stupid," she said bitterly. "This is the last straw."
"Last straw?" He put down his spoon and looked her straight in the eye.
She returned his gaze with her green eyes blazing. "It was bad enough that you made me scrimp and save all those years. I could live with it, if it'd actually paid off. But now you've wiped us out."
"We're not wiped out. It was less than 5% of our total net worth," he said. "It's not like the market has fallen to zero. It'll come back. It always has."
Sheena didn't look convinced. "That's the end of your bloody Findependence Day, isn't it?" she said. She walked over to flick on the stereo, punching in her �favourite light classical station.
"It will be a challenge getting there," Jamie said, "the way things look now."
"Apart from your irresponsible gamble, were we exposed to the market in the rest of our investments?"
"Of course. The 40% in fixed income is a nice buffer, as are the REITs and gold funds. I won't sugarcoat it. We're likely down $100,000 on our total portfolio. But that would have happened even without the investment loan."
"A hundred thousand?" Sheena's face paled. "Plus the $60,000 you borrowed? My God, we're destitute."
"No, Sheena, we're not. It's a temporary setback. If anything, we should buy more while stocks are on sale."
"With what?"
As the announcer on the radio began the 8 a.m. news, they both fell silent. The U.S. stock market was falling further, in sympathy with Asian markets that had fallen in reaction to the earlier decline in North America.
"It's everywhere," Sheena said. "Like falling dominoes. And you were leveraged, like an idiot."
Jamie sighed as fear and guilt combined into anger. "Had the market soared," he said, "you'd have thought I was a hero."
Sheena looked at him with contempt. "Not likely."
"Think I'll take a walk," he said.
Jamie slammed the door behind him and headed for the nearby park, where the neighbours walked their dogs. The coffee churned in his stomach. He'd put on a brave show for Sheena, but he only half-believed it. He passed newspapers in several boxes, all of which had splashed the calamity across their front pages, varying only in the point size of the type.
My timing couldn't have been worse, he thought. What was I thinking?
Theo always told him to ignore the media, but these days it was hard, with all-news radio, 24-hour cable TV news shows and the Web. The talking heads had been gnashing their teeth about the crash ad nauseum for 24 hours straight. The more they did, the more they fuelled the hysteria of the average investor.
It could be ugly, Jamie thought. If this is the big one, there's no telling how low it will go. Maybe Sheena's right. We should sell what we have left before it goes down further. Jamie had half a mind to run back to the house and put in a sell order at his online account, but he couldn't decide on the proper course of action. Maybe he should call Theo.
In the final analysis, no one knew anything. It was all just guesswork and luck. In his case, bad luck.
Jamie didn't even want to think about Findependence Day. Even without the leverage, being 60% in equities after the market fell 30% translated into an instant loss of more than 15%. Or was it 20%? One thing was clear. This was going to set him back a good five years, maybe more.
Jamie wished he'd never heard the word stock. He should have invested in nothing but bonds and cash, like his old man. He should have gone into teaching or worked for the government, joined their defined benefit pension plan and hung in for 30 years. What a fool he was.
Then he remembered something Theo had said about portfolio targets. Jamie turned around, quickened his pace and returned home. He had to get online. |
While the above is fictional, it is not unrealistic. Stock valuation is extremely complicated and even mutual funds and index funds need to be avoided by all but the most sophisticated investor, it seems. NNTaleb reccomends individuals invest in low-risk bonds and little else. Millions of people are not going to be able to retire now. It is a very bad situation. |
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seosan08
Joined: 10 Oct 2008
Location: Korea
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| Posted: Wed Dec 17, 2008 10:50 am Post subject: |
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| Don't worry, all those 3rd worlders Canada is importing en masse will save them! |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Dec 17, 2008 10:51 am Post subject: |
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| Totally irrelevant. |
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Hater Depot
Joined: 29 Mar 2005
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| Posted: Wed Dec 17, 2008 12:06 pm Post subject: |
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Most people everywhere are economically illiterate. Here is my favorite example from the US.
http://yglesias.thinkprogress.org/archives/2008/12/financial_literacy_and_literacy.php
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| An example of �basic� level quantitative literacy is �comparing the ticket prices for two events� and they�re saying 22 percent of the public isn�t up to the challenge. An example of �intermediate� level quantitative literacy is �calculating the total cost of ordering specific office supplies from a catalog.� |
You really have to wonder if a person who can't handle those tasks has any business putting their money in any kind of investment other than the underside of their mattress. |
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doc_ido
Joined: 03 Sep 2007
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| Posted: Wed Dec 17, 2008 8:47 pm Post subject: |
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Isn't that what we employ financial advisors for? While there's really no excuse for not being able to calculate interest rates (though technically I would define that as mathematical illiteracy), I would not have expected the fine print of various funds to be considered common knowledge. Perhaps financial institutions are looking to shift the blame onto the public. 
With so much at risk for small investors, it surprise me that people apparently haven't read or got advice on conditions and risks - however, the level of knowledge the article assumes to be necessary is like expecting random people on the street to know the circumference of Mercury or the capital of Kiribati. |
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Adventurer
Joined: 28 Jan 2006
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| Posted: Wed Dec 17, 2008 9:14 pm Post subject: |
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Well, who is educating the public about economics? I know that mutual funds are not insured, because only deposits at banks are insured as far as I know. I learned how to calculate interest in high school in an economics course, and learned a little more about it when I took a finance course, but that doesn't apply to your average Canadian.
Who is teaching them the stuff? No one. So, why should we expect them to know that stuff? |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Fri Dec 19, 2008 8:25 am Post subject: |
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| doc_ido wrote: |
| Isn't that what we employ financial advisors for? |
Unless freakishly independent, financial advisers are merely salesmen. |
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Jandar
Joined: 11 Jun 2008
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| Posted: Tue Dec 23, 2008 1:15 am Post subject: |
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| So long as the Queen of Canada is financially literate what else do you need? |
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