This is Financial Literacy Month – How financially literate are you?

November 14, 2013

The Financial Planning Standards Council FPSC, a non-profit association that promotes and enforces professional standards for financial planners through the Certified Financial Planning designation is promoting November as Financial Literacy Month.

Fifty years ago we could do very well with a general high school diploma – now a specialized college or university degree is often needed to achieve a reasonable level of income.  At the same time, just knowing how to save money and filling out a tax form was all that we needed to know in days of yore. Times have changed, now we need to know a lot more!

The statistics suggest that although we are wealthier individually than many of our parents, most of us are still not entirely comfortable with many of the important aspects of managing our money today.  Our children are not learning any more than we did.  The complexity of money management has increased and it’s not getting any easier to understand – those that don’t increase their financial proficiency will be at a disadvantage.

The changing earnings, tax, investment environment, and importance of financial security to our lives, and our children’s lives, mean we need to get serious about our level of financial literacy. We need to become comfortable in the various aspects of money and its management and increase our confidence and ability to make good financial decisions and help our children do the same!  Our financial decisions need to be based on a sound understanding of basic information and principles, rather than emotion or some so called experts strategy for getting rich in 6 easy steps.

The confidence we’ll gain in really understanding our money has the potential to increase our happiness by eliminating the fear of managing our growing estates and insuring our finances truly become one of the resources we use to achieve our happiness.

The following are seven key areas of basic money management skills every individual needs to strive to have a basic understanding of in order to develop money confidence.

Cash Management – How is a cash flow plan prepared for your household?

Tax Planning – What is a tax bracket? Bonus question – What are the three types of income and how are they taxed?

Risk Mgt – What’s the difference between T10 and permanent life insurance?

Credit Mgt – What’s a FICO score and what impacts this number?

Investment Planning – What are dividends and how would you get them?

Estate Planning – What happens if you die without a valid Will?

Retirement Income Planning – How much income will you need when you stop working and where will it come from?

If you found these questions difficult to answer, you are not alone! Understanding the answers to these questions would go a long way to help you become significantly more confident in evaluating the many options you have for your money.  If one of these areas is not important to you – it’s likely your children would benefit from the knowledge and who better positioned to help them!

This newsletter has been and will continue to be committed to increasing the financial literacy of our readers.  In future editions we will be including an article each month dealing with one of these topics and provide the basic information every individual needs to understand along with links to more in depth understanding. I encourage you to read, seek to understand, and distribute to your children and friends.

Once it was about Reading, Writing and Arithmetic, now we also need to understand, Cash Flow, Taxation, and Investment!

Does Financial News Help You or Hurt You?

David Rosenberg is the chief economist and strategist at Gluskin Sheff + Associates He has been recognized over the last 10 years for his accurate economic predictions.  In 2006, he was with Merrill Lynch in the US. He raised a concern with the US housing market but no one listened and we all know what happened.  He is one of the few economists I like to listen to because, as the saying goes, economists have predicted 9 of the last 5 recessions.

There’s no shortage of expert predictions and strategists recommendations in the news – many of them recommending the exact opposite.

Rosenberg’s economic predictions may have been more accurate (given hindsight) than the 36 experts quoted in this article:

36 expert’s predictions.

… who incorrectly predicted a recession within the last 5 years – but how would you decide who’s right – at any point in time?

The problem with listening to economists, even ones as good as David Rosenberg, is if their predictions cause you so much concern that you stay out, or worse, sell your equity holdings, you likely will be worse off.

Dalbar is a US Consulting firm that annually tracks investor returns against the returns of the comparable stock market index.  Each year the stock market wins by a wide margin over the investors. Meaning, the active investment management of individual investors is typically worse than a buy and hold of all the market stocks.

Active management vs. buy and hold.

I build my clients’ portfolio’s based on the following principles:

1 – No one can consistently or with sufficient accuracy forecast the economy. Kenneth Galbraith (economist) said: “Economic forecasting exists to make astrology look respectable.”

2 – No one can consistently or with sufficient accuracy predict market returns or time them. It’s about time (invested) not timing.

3 – No one can consistently or with sufficient accuracy predict future returns of any specific investment based on historical returns.

Given these principles, we build moderately diversified (by geography and sector) and concentrated (fewer stock holdings) portfolio’s.  We choose fund managers concerned with the valuations of the businesses they buy and with who is running these businesses and we allocate these funds appropriately. We want our investment managers buying businesses in the most promising sectors of the world economy at the best possible prices and we want them to sell when these businesses become expensive.  We base our investment allocation decisions (percent in cash and percent in equities) on long term historical averages – not short term predictions. Most importantly, we have faith the stock market will repeat itself rather than believe that this time it’s different – regardless what happens!

I would not want readers to think all economists’ predictions and financial news is useless.  I just feel most of it is – and reading too much of it increases the risk of acting too quickly on any of the information.  Pick a few level headed individuals who have been around awhile and read selectively.  Anything from Warren Buffet, Nick Murray, Bob Ferrall and David Rosenburg is worth reading – to name a few.

Below is an excellent (30 Min) interview with David Rosenberg explaining his prediction of the US and global economy over the next few years.  He summarizes why he believes the economy will improve over the next few years, why inflation will return, but employment and wages will rise.  With this improvement, and the increased tax revenue, the US will begin to reduce their deficit.

Link to video.