Catching a falling knife
John Cassar White
The past few months have proven to be a financial roller-coaster for most people who have worked hard for many years to build and protect their nest eggs. It takes a brave person indeed to predict which way the bond, equity, and commodities markets will be heading next. Have we hit the bottom or is there still more room for price corrections in these markets?
Encouraging a savings culture could well be the buffer between living comfortably and barely surviving in different stages of our lives especially after retirement. As more and more people head to retirement, knowing full well that their state pension will not be sufficient to cater for even their basic living needs, it has become increasingly important to rely on savings built during one's working life to ensure that the standard of living of retired people does not deteriorate drastically.
The rapid falls in equity and bond indexes in the last year show how easily hard earned wealth can be eroded. A portfolio of blue chip international equities could easily have lost 20 per cent of its value in just 12 months, and in some cases much bigger losses have been experienced. So how can one avoid the worst effects of such events?
The European Commission is trying to emulate the US in making financial literacy a required part of the school curriculum. In some countries the authorities target university students and young people in general with the aim of making them proficient in managing their savings and expenditure. The idea is that if you catch them young it is more likely that they will cater sufficiently well for their eventual retirement.
However, many practicing financial advisers confirm the result of empirical work that has found that financial education is not likely to have a major lasting effect on knowledge, and especially on behaviour.
Such work is contained in a research paper commissioned by the Financial Services Authority of the UK. "Financial capability involves knowledge and skills, but attempts to improve these may not lead to better outcomes", was the conclusion of this paper.
Psychology seems to be the main driver of what people actually do with their money. I remember distinctly many cases where supposedly well informed professional people have lost their shirts on investments that they should have easily avoided had they followed their knowledge of the risks involved.
One professional person, still very active in local public life, lost most of his hard earned savings by investing in Argentinean bonds which were giving a return much higher than one would expect to get from a safe investment in non-speculative bonds. Luckily for him, he is still young enough to start afresh and hopefully learn that greed in not a good guide to protecting your nest eggs.
Laura Willis, an associate professor at the Loyola Law School in Los Angeles goes further and even claims that financial literacy education may be damaging. A little learning may well prove to be a dangerous thing, especially if it makes you feel that you know which way the financial markets may be heading.
The often repeated metaphor that guessing the way the markets will be heading is not unlike catching a falling knife is very apt. If you mange to catch the knife, then you have a free knife. If you do not catch the knife, you are likely to end up with badly cut fingers.
Ms Willis concludes her research with some very pragmatic advice. "Providing people with a market-savvy education, which need not even be applicable only to financial services, would be useful. Teaching them how little they know and how the interests of people selling products can affect them, understanding the psychology of marketing, that could be very powerful."
Encouraging a savings culture could well be the buffer between living comfortably and barely surviving in different stages of our lives especially after retirement. As more and more people head to retirement, knowing full well that their state pension will not be sufficient to cater for even their basic living needs, it has become increasingly important to rely on savings built during one's working life to ensure that the standard of living of retired people does not deteriorate drastically.
The rapid falls in equity and bond indexes in the last year show how easily hard earned wealth can be eroded. A portfolio of blue chip international equities could easily have lost 20 per cent of its value in just 12 months, and in some cases much bigger losses have been experienced. So how can one avoid the worst effects of such events?
The European Commission is trying to emulate the US in making financial literacy a required part of the school curriculum. In some countries the authorities target university students and young people in general with the aim of making them proficient in managing their savings and expenditure. The idea is that if you catch them young it is more likely that they will cater sufficiently well for their eventual retirement.
However, many practicing financial advisers confirm the result of empirical work that has found that financial education is not likely to have a major lasting effect on knowledge, and especially on behaviour.
Such work is contained in a research paper commissioned by the Financial Services Authority of the UK. "Financial capability involves knowledge and skills, but attempts to improve these may not lead to better outcomes", was the conclusion of this paper.
Psychology seems to be the main driver of what people actually do with their money. I remember distinctly many cases where supposedly well informed professional people have lost their shirts on investments that they should have easily avoided had they followed their knowledge of the risks involved.
One professional person, still very active in local public life, lost most of his hard earned savings by investing in Argentinean bonds which were giving a return much higher than one would expect to get from a safe investment in non-speculative bonds. Luckily for him, he is still young enough to start afresh and hopefully learn that greed in not a good guide to protecting your nest eggs.
Laura Willis, an associate professor at the Loyola Law School in Los Angeles goes further and even claims that financial literacy education may be damaging. A little learning may well prove to be a dangerous thing, especially if it makes you feel that you know which way the financial markets may be heading.
The often repeated metaphor that guessing the way the markets will be heading is not unlike catching a falling knife is very apt. If you mange to catch the knife, then you have a free knife. If you do not catch the knife, you are likely to end up with badly cut fingers.
Ms Willis concludes her research with some very pragmatic advice. "Providing people with a market-savvy education, which need not even be applicable only to financial services, would be useful. Teaching them how little they know and how the interests of people selling products can affect them, understanding the psychology of marketing, that could be very powerful."