Why Financial Literacy Is Critical All Over The World
November 18, 2015
Hello, my name is Logan Phillips and I am a student ambassador for the TMX Montreal Exchange Options Simulation as well as for Voleo. It is very important for individuals to understand financial products that they use and the financial advice they receive. Having a firm grasp of financial literacy allows an individual to be self sufficient in long term retirement planning as well as being effective at short term financial planning. Financial literacy such as understanding whether you should buy a stock or a GIC in a particular circumstance is very important. If an individual is expecting a large cash outflow in a year from now they should buy a one year GIC since they are guaranteed to receive their principal back plus a little more at the end of the year.
A risky stock that might be cut in half by next year, would not be a good investment in this situation. Let’s consider a different example, a young individual 25 years old is trying to save for retirement in 40 years from now. He has a very long term time horizon and is able to take above average risk in order to attempt to achieve higher returns. In this situation buying a stock makes a lot of sense. Ultimately the asset weight of his portfolio would be weighted higher to equity (stocks).
It is a simple comparison like the one above, that perfectly shows how having financial literacy would help an individual in two different situations. The common reason that Canadians, and people all over the world do not pursue the goal of Financial literacy is that they let their local financial advisor at their bank handle the financial planning in their life. Although this is easier, it is much costlier. These retail banks often hide fees in the products they provide to clients and unfortunately offer active investment instruments that often do not outperform passive vehicles.
This means that for the 25 year old who wants to retire in 40 years, the bank would provide him with an equity mutual fund. This mutual fund would have fees in the 1-3% range but would most likely return less than a product with fees of 0.05%. Over those 40 years, the fees would eat into the returns substantially and at retirement the client would not have as much money. Ultimately the only way to understand this principle of fees, returns and conflict of interests that are inherently present in retail banking, an individual must have a firm grasp on Financial Literacy.
For the reasons outlined above and countless of other reasons, financial literacy is a skill that everyone should have. With the rise of the internet as a power communication and learning tool, there are no more excuses. Individuals can become educated on prudent financial practices and avoid high fee products.
Having financial literacy skills can save individuals from falling into massive debt traps and it will eventually lead to a happy stress free retirement. I urge all readers to ensure that they feel confident in their financial literacy skills! A great resource for learning financial literacy is to use a website like money mentors or even to register in a virtual stock simulation like Voleo’s to learn just how volatile the global capital markets are and to learn the basics of buying and selling a stock.