Sent from my Verizon Wireless BlackBerry
From: Carl Richards <carl@behaviorgap.com>
Sender: "Carl Richards" <carl=behaviorgap.com@mail177.atl61.mcsv.net>
Date: Thu, 22 May 2014 19:04:49 +0000
To: bob<mainandwall@gmail.com>
ReplyTo: <us2-71940797d1-8385fa5269@conversation01.mailchimpapp.com>
Subject: Behavior Gap: Only 33% of You Can Answer These 3 Questions
| | How much do you think you really know about money? Maybe you said a lot, maybe you said a little, but let's set a baseline by seeing if you can answer these three questions (answers come at the end — no peeking). 1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 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?
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy.
(a) More than, (b) exactly the same as, or (c) less than today with the money in this account?
3. Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’
(a) True or (b) False. These questions come from a study on financial literacy conducted by Annamaria Lusardi and Olivia Mitchell. They conducted this test in countries all over the world, and the results were alarming. While "most Americans rate themselves high on financial acuity," only about a third of Americans could answer all three questions correctly. In our pursuit of best investments and hot managers, it appears we've skipped right past the need to build a financial foundation.
If you're an advisor, have you measured just how much your clients really know? Does the rate of return really matter if we don't have a basic understanding of how interest works in the first place?  I've often said the secret to investing success isn't skill but behavior. I may need to modify that to include knowledge of financial principles. One of the things that helps drive behavior is understanding the reasons why we're doing what we're doing. In the third question, the one about buying a single company stock, doesn't it help behavior to know the why behind why that question matters?
If we want people to make smarter money decisions, we need to stop assuming that people "just know" what we might describe as basic knowledge. The same goes for what we "think" we know. As this study makes clear, it's a lot less than we might hope.
OK, the moment of truth. Here are the answers to the questions: (1) More than $102, (2) Less than today, and (3) False. How'd you do? Any surprises?
I want you to think about these questions (and how you did) the next time you debate changing an investment plan yet again or going along with a surefire, can't-miss offer from your brother-in-law. Do you really understand all the pieces on the board, or are you acting on incomplete information?
Carl
In Case You Missed It   
View email in your browser.
| | | | | |
No comments:
Post a Comment