I have been thinking a lot about this issue of how to make investing simpler. I hear from teachers that this is a real pain point for them. I can see in the NGPF podcast stats that the most popular guests tend to be conversations about investing (Mike Finley, Jonathan Clements and Vanguard’s Jim Rowley to name a few). Then this weekend the lightbulb went off. I was heading to the coast listening to Charlie Ellis on the Masters In Business podcast (kinda dorky I know). Those of you not familiar with Charlie Ellis, he is probably the best investment management thinker you have never heard of. Charlie has played a role in two of the juggernauts of modern day investing, the Yale endowment and Vanguard Investments (the king of indexers just crossed $4 billion (I mean TRILLION!)). Oh, and he was an early investor in Berkshire Hathaway too (Warren Buffett’s company)!
Our first savings lesson focused on four learning objectives:
- Importance of saving
- Power of compound interest
- Understanding different types of savings accounts
- How to make saving automatic
Here is a summary of this lesson which will be part of a 24 hour curriculum that Sonia is currently packaging and will release later this spring. I provide this summary in case you are teaching savings now and looking for some ideas to supplement what you are currently doing:
I am so proud of the NGPF team (Jessica, Sonia, Laura, Ren, Sid and Niko) that has worked feverishly to deliver a revamped Saving Unit that we released tonight. Why do we continue to revamp our lessons? The short answer can be found in our culture of continuous improvement as we are always looking for ways to make our lessons stronger (your feedback is critical in this process). Here is the longer answer:
Thanks to Allan Roth for recently joining the NGPF podcast. I got to know Allan a few years ago when I needed an advisor to help me “tune-up” my portfolio. I appreciated his candor, his analytical chops, his thoughts on asset allocation, his laser focus on fees and his willingness to challenge some of my assumptions. One of his best suggestions was that I create an investment policy statement which serves as a guide to my asset allocation during those turbulent market conditions that try mens’ (and womens’) souls. He wrote a provocative book that I recommend, How A Second Grader Beats Wall Street, which describes the simple strategies needed to be a successful investor (you will find out exactly who this wise second grader is during the podcast). Listen to this podcast and you’ll walk away with some ideas to make you a better investor. Enjoy!
I had the Honorable John Ninfo on my podcast recently who described his “Scared Straight approach” to teaching young people about the perils of credit. He saw the consequences in the decades he served as a Bankruptcy Court judge in the state of New York. After looking at this infographic from the WSJ and the accompanying article, the overwhelming evidence is that we should be employing similar scare tactics to the topic of retirement planning because we better hope that the next generation is better prepared for taking on this responsibility:
Some good laughs here but also some good messages (which I have paired with corresponding NGPF resources):
Message: With the power of compound interest, it is important to start saving as soon as possible!
- NGPF Activity: Calculate Compound Interest
Please, please, please teach this concept to your students. The concept of compound interest makes the “greatest hits” list for most personal finance curricula. What doesn’t make the list is the impact of “compounding fees” which has a dramatic impact on what is left over after a lifetime of investing.
Courtesy of NY Times and Vanguard, we now have a handy chart showing exactly how much of an investor’s returns get eaten up by those ever so subtle fees that have a dramatic impact on what’s left at the end:
First, some quick orientation is in order. The chart was created with these assumptions:
- $40,000 year starting salary with an annual raise of 1%.
- Conservative investing return of 4% (historical equity returns are closer to 7-9%)
- Savings rate of 6% of their salary
- 30 year savings period
The individual bars in the chart indicate the account balances (in thousands of dollars), after 30 years, based on the assumptions above. Why do the bar heights differ? Yes, you guessed it, it’s the fees! An index fund may carry fees of 0.25% of assets (or lower) while actively managed funds have fees close to 1% on average. One flaw that I see with this analysis is that it assumes the same 4% return for each of the funds before fees. Therefore, this chart wildly understates the impact of fees as the lowest fee funds typically are the best performing funds. Yes, investing is one of those rare instances where the best products are the cheapest!
Questions for students:
As if we needed another piece of evidence, a new study (OECD/INFE International Survey of Adult Financial Literacy Competencies is the official name) out from the OECD tells us what many of us already know. Most consumers around the world are NOT financially literate. The US chose not to participate for some reason, so I was left without the easy headline of “We’re number 1 (NOT), I mean number 14, when it comes to financial literacy.”
I have a simple request to the research world. Please, please, please stop with these surveys showing a lack of financial literacy. We know already…financial literacy around the world sucks! I don’t need another study to confirm that!