I am astounded at the ignorance concerning money and investing

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Zeus-cat

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My wife recently showed me this article from the Wharton School of Business. Back in 2004 several researchers at the school decided to do a study on what people knew about basic finance and investing. The researchers did the study because pension plans are going away and more of us will be responsible for putting money into 401Ks, IRAs, etc. They wanted to see how many people understood basic financial concepts that were related to investing in these retirement accounts.

The researchers themselves were shocked that so few people could answer these three simple questions (questions listed below with the answers at the bottom of the post). And it’s not just the U.S., similar results were found throughout Europe. About the only good news was that people in Russia were far worse than the U.S. and Europe.

Overall, 50% of Americans age 50 and older got the first two questions right. Only a third of those people could answer all three questions correctly. These are NOT difficult questions.

Here are the three questions:

Question 1: “Suppose you had $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) Do not know/Refuse to answer.”

Question 2: “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. C) Less than today. D) Do not know/Refuse to answer

Question 3: “Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.”

I am shocked that only a third of the people polled could answer these three questions correctly. This is pretty simple stuff and if you don’t understand this how can you make financial decisions regarding your retirement, or just about anything for that matter. I’m probably being overly dramatic here, but what is the future for capitalism if people don’t understand this stuff?

Here’s a link to the article: https://knowledge.wharton.upenn.edu/article/three-questions-major-implications-financial-well/

The article also has a link to the research paper which is about 30 pages long or you can find it here: https://www.nber.org/papers/w17078 It’s entitled “Financial Literacy and Economic Outcomes: Evidence and Policy Implications” it has a bunch of statistics.

Here are the answers, I help you did better than the average American:

Answer to question 1: A) more than $102
Answer to question 2: C) less than today
Answer to question 3: False
 
I got them all, but then again I have a business degree.

Part of the problem with our educational system is that there is not a lot of education/training on problem solving and critical thinking, but a lot of memorization and "how to's" on test taking. Even if you didn't understand compounding interest, if you have a basic understanding of math and how free markets work, along with a mind trained in how to think through a problem, you should be able to get all of these questions correct.

That's one aspect I like about rocketry. If you are doing any kind of scratch building, it's on you to critically think the problem through and solve it. It helps keep the mind sharp and fit. :)

Greg
 
A huge Plus One to both of the previous posts! You don't suppose that the government monopoly on education is a major part of this problem?
 
I'm 42, so under the 50 break. This was covered my sophomore year in high school. We had the option of taking Economics or another more rudimentary class for the non-college bound (I forget what it was called). It was required to take one or the other.

Even if someone didn't take a finance class, the 1st two questions are elementary school math. There's more disturbing here than just elementary finance.
 
They really don't teach financial literacy in schools. A lot of people do not understand how even the most simple things like interst rates and inflation rates work, let alone how markets work. Add into that the complicated tax issues and the affects of fees on your investments, and only a small fraction of the population really has a clue.
 
Did you ever notice that when schools are closed because of snow that most of the kids have smiles on their faces? Perhaps that is because they enjoy a break from the relentless indoctrination masquerading as education?
 
I got them all right..
I really do hope I'm not being an ass,, but,, I found them ( the first 2 for sure ) a bit insulting to my intelligence....
I am shocked at the statistics....
You are definitely not being overly dramatic....
What a great question....
You are responsible for your retirement fund ( hopefully a nice size sum of money ),,,
And you don't understand these fundamentals ??????
That's a very bad thing....

Teddy
 
you know, I vaguely remember math class talking about compounded interest. it was part of the 'percent' portion of the class. I remember "humanities' where we learned about sex, religeion, and a few other aspect of "adulthood". I remember learning how to read, how to speak French (Quebec school system) and how to plot a parabola. I also remember how a 4-cycle engine works, and why you don't jam a block of wood a certain way in the belt sander.

But I do not ever remember a class where I learned exactly how to calculate interest on an investment, what a '2% per annum' means, how a phone bill, gas bill, water bill works, how to 'amortize a cost over a length of time (or quantity of items), nor even really how banks make their money.. (is a 2% interest savings account a good deal?!?)

I do feel, it's long overdue that schools should teach a 'how to live' class. how to deal with everyday expectations as described above. most of us are tossed out of school, and learn (the hard way) what happens when you miss a Visa payment, why the cost of electricity suddenly shot up, why that 2% raise really didn't help in any way.. (I also feel school classes, here at least, are too big. They should be 20 students max, to really get "personal". And here, all the kids are being lumped into one class. No more 'special needs' classes, and no more 'advanced' classes. The bully, the brain, and the 'special needs' are all in the front row, taking the teachers time. the rest are in the back, figuring it out for themselves..)

But it does come down to what was said above, that schools aren't as equipped to teach, and students expecting it to be easier than it really is. (I have a friends who abhors math; can barely add, but blames 'the system' for her money troubles)

I am amazed that many can't figure out how to leave a tip.. how to calculate 10, 15, or even 20% of the bill to leave as a tip.. They all look at me like I'm a genius when asked how much to leave as a tip. The service was OK, therefore, 15%. 15% of $23.65.. move the decimal one the left, then add half of that.. so, 2.36 + 1.18.. about $3.50. [blank stares. I actually have to draw it out for them] Ok, the service was excellent; 20%.. Move the decimal one the right & double it.. [again, blank stares.. "why do you double it?!"]
 
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Another investment question: Which would you rather have - 100k in gold, 100k in mutual funds, or a classic hot rod worth 100k?

Best answer next post
 
I think we are going to find that the whole movement away from a defined-benefit pension-type retirement system to a defined-contribution 401(k) type system is going to be a social disaster that will unfold over a generation. Many people really do not have the financial sophistication to make good long-term financial decisions and stick to a sound strategy for 40 years, which is really what it takes to build a solid retirement fund. Somewhere along the line, they make a bad decision or the market takes a bad turn (which can also trigger a lot of bad decisions) and they end up falling short. I'm pretty convinced we are going to see a whole generation of elderly people living in poverty.
 
Best answer:

With 100k in gold, the price can go up or down considerably. You don't know what the real value is until you decide to sell it. If you're in financial trouble and need to sell off some, but the price has dropped, you've lost that money.

The car would be fun to have. However, there are significant expenses involved; insurance (even if you don't drive it), maintainance, and storage (even if you don't drive it).

The best answer if mutual funds. While the value of the stocks will go up and down, they will almost always pay out a dividend. You make money just by owning them, without having to sell them. Once you sell it, that particular asset is gone.
 
That scares me to think people don't comprehend those basic questions.

Then again, some people on this forum don't understand inflation...how many times have I heard the 'Why back in my day, things were cheap...' without actually doing the skull sweat to figure out what things cost now verses what they cost then in adjusted dollars.

But I learned very early on about just the simple things like making sure your debts don't outstrip your income. Just that lesson forces you to think about where your money goes, which in turn gives you incentive to learn about other things like interest, investment planning, loans, taxes, etc.

FC
 
Well I got them right quite easily. I took personal finance last year, which had a good teacher and covered the information well, but IMO should have covered more than it did. There was no mention of filing taxes, where tax money goes, how inflation works, why it happens, etc. I knew the question about inflation from what I learn listening to the news and reading stuff on my own. It sure sounds sad, IMO that such a few number of people could answer those questions- they really weren't hard. I know I'm just an ignorant young one, but I mean really? If your money is growing at 2%, will you have less? Come on. Regardless, I'm not in a position to debate education, but I do wish they taught us more of this stuff.

Nate
 
I'm old. I'll take the car! I use the 2 line tax form:
line 1; What did you make last year? ______________
line 2: Send it to us.
I have a 200.5K retirement plan-the government gets half.
After that all the comments get real political,so......
 
I got all three right. Not bad for a old fart! When I was in High School we spent a whole school year playing the stock market. They keep telling us that was the way to go to make money. Being a tightwad I always invested most my earnings in a bank account and had built up a nice some of money. I just seemed so easy. Stick it the bank and forget about it. (Out of sight, out of mind kind of thing) I did crappy at the stock market.

After I got out of the Air Force and finished college. I decide to re-invest some of my savings in other types of investments. After spending a few hours pouring over spread sheets I picked a large investment firm and a mutual fund. When I got the first quarter statement I was shocked. I had earned more interest in a quarter than I had all year with my savings account. I couldn't believe that high school had wasted a whole year on stocks and they had never taught us about mutual funds. Today, I just smile when the statement comes.

I try and educate the young firefighters on investments and their future. Simple things, like taking 10% of their monthly check and stick it in a mutual fund. They say, "I'm OK. I have deferred savings." It is so sad, that they have no knowledge of investing for their future and how much the livings costs will effect them.
 
#3 is BS. It cannot be answered true or false.

Correct answer is the right stock will always outperform a mutual funds + it should be tailored to the age and risk of the client.
aggressive, income, conservative etc strategies set depending on age and willingness for risk

Take Exxon, Chevron & IBM for instance.
If you bought any of those in the past 50years, at price other than peaks, with compounded dividend re-investment and value increase of price + splits you would have outperformed 99 % of over 7,000 funds....way, way outperformed.

100,000 10-15 years ago is worth 380,000 today, even in this market.


Mutual funds for the most part are a lazy mans way out. Almost all charge s fee from .5 to 1.5 percent plus hidden charges..Over a course of 25-30 years if you invest 5-10,000 per year in your "fund" the compounded fees will have cost you 125,000 to 170,000 out of your retirement worth.... 500,000 to 1,000,000.
That's more than I want to pay.

If hell bent to invest in some type of fund, index funds are a better option.

The 2 most expensive single things a man buys in his lifetime are: Car & House. We take tons of time researching what the best value of them are before buying.
Yet the average person willing turns over their life savings to some manager to take of for them and hope for the best.
90% earn their keep by fee based transactions.
They all will tell you when to buy, that's easy.
But when do you sell...hmmmm.you can bet their company has eliminated bad positions before you hear about it.
Walk in the door with money to invest and it's gone before you leave.
They never wait till the correct time to buy, which could be days or weeks.

Average mutual fund turns over or "churns" a minimum 80-100 stocks a year to keep up with the times.
Want a real eye-opener...try finding all the equities listed in any particular fund...good luck on that one.
Not the "top" 50-100, but all of them held for the last 1 year period.

Never buy anything you can't understand or explain in a couple of sentences
Never buy anything you wouldn't want to own the whole company.

I know what Mcdonalds sells and does along with Exxon, Colgate, Clorox, Proctor & Gamble, GE, Leggit & Platt, etc.
Never buy unless company has track record of paying dividend consistently for at least 25 yrs. {of course there are exceptions, new companies for instance.] There are less than 50 stocks that fit criteria above, so it's not rocket science, buy on the dips. Add to positions & hold forever.
Anyone starts before the age of 25, puts 3-5000 a year away....will be worth at LEAST 1-1.5 million at retirement on a total investment of 30yr X 3-5,000= 90,000- 150,000 = over 1,000,000 at retirement.

Time and compound interest are your friends Money doubles roughly every 10yrs at 6% and 6 yrs at 10% compounded not including value.

The person who waits till 40-50yrs of age cannot catch up even by putting 30,000 -40,0000 per annum away.
Time wins hand down.

All it takes is 6 months of studying and research, and you can do all of it on your own.
It takes longer than that to get proficient building rockets.

I have taught many.

I have had brokers,fund managers, personal client agents and used many different big name agencies over the years.
I started managing my own 20 years ago and haven't looked back since I asked my broker what he had in his fund.
None of your business, that's confidential. Yet he knows everything about your money.
Every single broker out there should be a Millionaire within 10 years of working, they are not.
Just like plumbers, electricians, doctors.....good & bad ones and some should not practice at all....their ONLY common thread is to make money for their company . With all the resources they have access too, how can they not fail, but they do....for the most part they are order taking employees.

You wanted to learn building rockets, you invested the time needed to do it.
Invest in yourself and take the time needed to do it. All the resources are on the web Google TD-Ameritrade Investment Business Daily , etc. all have learning centers for beginners'.

Many of you know me from my wacky antics....but for sure, I have a serious "other"....side & this is it.

"Greed is Good":dark:
You can't make REAL money, working for it, let money work for you.:dark:
"Money never sleeps" :wink:
 
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I am shocked that only a third of the people polled could answer these three questions correctly. This is pretty simple stuff and if you don’t understand this how can you make financial decisions regarding your retirement, or just about anything for that matter. I’m probably being overly dramatic here, but what is the future for capitalism if people don’t understand this stuff?


You have answered your own question...."what is the future for capitalism if people don’t understand this stuff?"

The future is in the so called hands of " the rich get richer" today defines folks that have a million or more. That's because they are willing to educate themselves and take the time to do it.

1 million isn't didly anymore. To retire with that alone, would yield conservatively, 40-50,000 per year, to live on. By the time your done with taxes more like 25-30,000.

Remember those folks that never made more than 25-50 K a year, but managed to have 1 mil by investing, are now considered rich and must pay all the increased taxes this year slipped through congress.

In case you didn't notice…

Here is what happened on January 1, 2014 :

Top Medicare tax went from 1.45% to 2.35%

Top Income tax bracket went from 35% to 39.6%

Top Income payroll tax went from 37.4% to 52.2%

Capital Gains tax went from 15% to 28%

Dividends tax went from 15% to 39.6%

Estate tax went from 0% to 55%

How many of you were are of that? Own any equities in retirement? Capital gains will effect all sooner or later depending on when you withdraw.
You paid your taxes when you made money.
Now your taxed again because you were frugal enough to invest.
Then you get hit really hard when you die and leave an inheritance....yes I know about the limits of 5 mil or more, but that's been taken away before, the re-instated. who nows when the tax laws change, which leads to this........

Once you have any real funds... you better have a good CPA and Tax attorney [which costs even more] to keep nest egg.
So back to the original question, the future of capitalism belongs to those willing to invest their time and money fighting off legislation to take it away from you.
And this is one of the reasons it's not taught in public schools along with the fact most teachers today don't even understand how the system functions. let alone teach true capitalism.:smile:
 
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That is astounding, especially in light of this:

I consider myself as knowing absolutely NOTHING about investing/stocks/retirement plans/etc. Honestly, I believe that I'm basically completely ignorant in these matters. And I obviously have no investments. I just don't get it - my financial knowledge is pretty much limited to: A) I work X amount of hours, and get X amount of dollars for it, which allows me to purchase X amount of "stuff", and B) I've had, and paid back, basic loans (school and such) with interest of course.

And I got all the answers correct - in fact they seemed dead simple to me.
If someone like me can answers these questions, they are really not all that difficult.

s6
 
Here's a pretty simple explanation of interest. It is the cost associated with using other peoples' money. I didn't learn that in school. I learned it the hard way...by borrowing! :facepalm:
 
Jim,,,,,,,
Very,, very impressive indeed.............

Teddy
 
I just figure I'll die working. Once I retire from work, I'm going back to the family farm. Where better to die working than on the land I own?
And unfortunately I'm not kidding. Just realistic. And content with that.

Adrian
 
I think it's really not so important to be able to do the mathematical calculations on a lot of these things as it is to be able to understand the principles involved and have an unintuitive understanding of what is happening. So for the first question, you don't need to actually calculate interest on $100 at 2% over 5 years. All you need to know is that 2% on 100 is 2, and after 5 years, you'll have more than $102. For the second question, you need to know that interest increases the amount of money you have, but inflation decreases the value of money, so if inflation is higher than interest, you are losing purchasing power.

My feeling is that if you could teach these kinds of financial principles, you don't need to teach all of the math. Let kids use a calculator or computer or online tool to do the detailed calcs, but familiarize them with what is going on with interest rates, how a credit card works, how a mortgage works, how a bank account works, how stocks work, how taxes work, how insurance works, what builds wealth, and what eats it away, that's what a lot of people don't understand.
 
My grandpa graduated from the Wharton School in 1914.

Other than that, I got nothin.

:eyeroll:
 
#3 is BS. It cannot be answered true or false.

Correct answer is the right stock will always outperform a mutual funds + it should be tailored to the age and risk of the client.
aggressive, income, conservative etc strategies set depending on age and willingness for risk

Take Exxon, Chevron & IBM for instance.
If you bought any of those in the past 50years, at price other than peaks, with compounded dividend re-investment and value increase of price + splits you would have outperformed 99 % of over 7,000 funds....way, way outperformed.

100,000 10-15 years ago is worth 380,000 today, even in this market.


Mutual funds for the most part are a lazy mans way out. Almost all charge s fee from .5 to 1.5 percent plus hidden charges..Over a course of 25-30 years if you invest 5-10,000 per year in your "fund" the compounded fees will have cost you 125,000 to 170,000 out of your retirement worth.... 500,000 to 1,000,000.
That's more than I want to pay.

If hell bent to invest in some type of fund, index funds are a better option.

The 2 most expensive single things a man buys in his lifetime are: Car & House. We take tons of time researching what the best value of them are before buying.
Yet the average person willing turns over their life savings to some manager to take of for them and hope for the best.
90% earn their keep by fee based transactions.
They all will tell you when to buy, that's easy.
But when do you sell...hmmmm.you can bet their company has eliminated bad positions before you hear about it.
Walk in the door with money to invest and it's gone before you leave.
They never wait till the correct time to buy, which could be days or weeks.

Average mutual fund turns over or "churns" a minimum 80-100 stocks a year to keep up with the times.
Want a real eye-opener...try finding all the equities listed in any particular fund...good luck on that one.
Not the "top" 50-100, but all of them held for the last 1 year period.

Never buy anything you can't understand or explain in a couple of sentences
Never buy anything you wouldn't want to own the whole company.

I know what Mcdonalds sells and does along with Exxon, Colgate, Clorox, Proctor & Gamble, GE, Leggit & Platt, etc.
Never buy unless company has track record of paying dividend consistently for at least 25 yrs. {of course there are exceptions, new companies for instance.] There are less than 50 stocks that fit criteria above, so it's not rocket science, buy on the dips. Add to positions & hold forever.
Anyone starts before the age of 25, puts 3-5000 a year away....will be worth at LEAST 1-1.5 million at retirement on a total investment of 30yr X 3-5,000= 90,000- 150,000 = over 1,000,000 at retirement.

Time and compound interest are your friends Money doubles roughly every 10yrs at 6% and 6 yrs at 10% compounded not including value.

The person who waits till 40-50yrs of age cannot catch up even by putting 30,000 -40,0000 per annum away.
Time wins hand down.

All it takes is 6 months of studying and research, and you can do all of it on your own.
It takes longer than that to get proficient building rockets.

I have taught many.

I have had brokers,fund managers, personal client agents and used many different big name agencies over the years.
I started managing my own 20 years ago and haven't looked back since I asked my broker what he had in his fund.
None of your business, that's confidential. Yet he knows everything about your money.
Every single broker out there should be a Millionaire within 10 years of working, they are not.
Just like plumbers, electricians, doctors.....good & bad ones and some should not practice at all....their ONLY common thread is to make money for their company . With all the resources they have access too, how can they not fail, but they do....for the most part they are order taking employees.

You wanted to learn building rockets, you invested the time needed to do it.
Invest in yourself and take the time needed to do it. All the resources are on the web Google TD-Ameritrade Investment Business Daily , etc. all have learning centers for beginners'.

Many of you know me from my wacky antics....but for sure, I have a serious "other"....side & this is it.

"Greed is Good":dark:
You can't make REAL money, working for it, let money work for you.:dark:
"Money never sleeps" :wink:


I'm not sure I agree that this kind of expertise is really and truly in reach of every person. And I am certain not everyone WANTS to become an expert investor and have the ability to research and evaluate companies and market conditions. It takes a lot knowledge and skill, and there is still an element of luck and timing. It also takes a lot of emotional discipline. I agree that there are a lot of brokers and firms whose main business is churning your investments and siphoning off fees, but there are some where that is not so much the case, and you will definitely do better over the long term than simply stashing cash in a bank account.
 
so. my approach of burying mason jars full of money in the back yard isn't the best approach?? :confused2::confused:

just joking :neener:

Frankly, I don't/can't follow all the financial stuff to figure out how to best invest my money
And in my opinion, the reality is none of the "experts" can either (or else they would all be rich and not need to work and chase me to get my money). They make their money by using mine, not by investing their own.....

My company got sold and I left my original funds in the old company's 401k. I got a call from a hot-shot investment firm wanting me to roll my money over to them.
Hey - we got 50 choices! I have trouble deciding between the 12 my old company offered
Meanwhile, I decided to talk to them (hey - talking never hurts). One thing they did was compare how my money would have done if I had invested through them for the previous 3 years vs how I actually did for the last 3 years. They would have provided me 3.5%. My "dumb luck" netted me nearly 9%
Needless to say I didn't transfer my money........ but I did stay at a Holiday Inn Express.....:wink:
 
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