On the Need for Improved Financial Literacy

The need for improved financial literacy nationwide is conventional wisdom: a simple internet search will bear that out. I challenged this in my last post because people seem to have little interest.

Although I criticized this challenge based on limited sample size, it may have some merit. People are generally uneducated about investing and they seem quite willing to let professionals do the job for them. In terms of value, financial literacy differs from functional literacy. Many people who cannot read or write have felt the squeeze over their lifetime from those around them including prospective employers. Hiring financial advisers is much more socially acceptable than functional illiterates asking others to read/write for them.

This pertains to a blog post I wrote in January where I decided it wasn’t the result of a brainwashing perpetrated on the American public by the financial industry. Rather, the decision to hire investment advisers is a delegation of duty. The cost of this delegation includes management fees and lower investment returns.

We could ask whether the real issue regards a need for improved financial literacy or a choice about how people wish to invest. I don’t think the average person has enough education to decide on the latter so perhaps it does come back to financial literacy. I could also argue that most financial professionals don’t know as evidenced by the fact that so many of them do not employ options.

In the last post I pointed out that trader education is a subset of financial literacy. One can know a lot about finance, understand the role of investment advisers, and know how to interview/select a knowledgeable adviser. Even someone educated in finance may elect not to take that next step and manage his/her own investments.

I think the basics of financial literacy aim to keep people out of a “paycheck-to-paycheck” struggle. This involves how debt works, proper budgeting, savings/interest, etc. Investment management pertains to savings above and beyond that needed for annual living expenses. Getting a large proportion of the working class to establish and maintain a rainy day fund would represent a significant move higher in terms of financial standing. Having surplus capital available for trading and investing, though, is still a whole other level.

For those in possession of surplus investment capital, financial literacy may be channeled into a business. This is what I have done in order to retire from Corporate America. The pharmacist in me would point out a similarity to the way some have turned “medical literacy” about dietary supplements into a business. Despite having no customers, I would argue that my product is supported by data whereas many claims regarding dietary supplements are baseless and invalid.

Giving Back (Part 3)

Before continuing forward, I want to clean up a couple things—the first being the need versus achievement debate. I’m not really in a position to assess achievement. You could also make the case that I’m not really in a position to assess need. I therefore will not be deciding whom to teach based on those criteria.

I have discussed two monetary factors with regard to a trader education program. I have the previously stated reasons for charging a per-session fee. I would also recommend having ample savings to eventually open a real account. Both of these are included to try and prevent students from dropping out, which would result in time wasted for me [preparation of presentation material] and for them [education never applied].

I have thought about giving back by taking an entirely different avenue: teaching high school students. Kids are generally means-challenged so I would not charge a per-session fee. Neither are they likely capable of opening live trading accounts. They do have a solid potential for future income, however, which is wealth they could later manage on their own. Because option pricing models and considerations of probability and statistics all fall under the “advanced/theoretical mathematics” category, I would target advanced math students. This would also get me academically-disciplined students to work with who would be more likely to complete the program.

On a totally different note, I was tempted to argue against the “improve financial literacy” battle cry because people simply did not seem interested based on my recent exercise of getting 11 responses from 54 messages sent. Cost could have been a confounding variable; people may have been unwilling to pay a stranger. I also have no way of knowing how many of my 54 messages were actually received. Over the years, I have gotten poor response rates over the Meetup.com website. For all I know, only 11 people were even aware they received a message.

I do have other reasons for thinking people may not have much interest in learning to trade. Over the years I have approached a few different libraries about conducting a trader/investor program. This was met with lukewarm response because they had not found investing programs to be well-attended in the past. This was the same reason the Ann Arbor District Library gave for discontinuing their subscription to Value Line a few years ago.

Learning to trade, though, is only one subset of financial literacy. I cannot conclude from this that people have little interest in the latter.

Giving Back (Part 2)

The current topic under debate is whether I should give back by trying to teach those without the resources to pay or those who have demonstrated achievement.

I think a significant discount qualifies as “giving back” even if it is not free. I thought about charging per meeting as motivation to stick with the program (it’s harder to abort once we have begun to commit). $20 per monthly meeting would be $240 for a year, which is far less than programs costing thousands of dollars. I would also encourage people in the group to study and practice (paper trade) together. Anytime they have questions I would be happy to answer. This would be a dynamite training package for a steal of a deal.

I am quite convinced that no matter how small, participants must have some skin in the game. I can’t force them to trade and I don’t want to do anything that might put me in an “investment advisor” role because I am not a registered investment advisor. A per-meeting fee helps them—by providing motivation to get through—and it helps me by lowering the probability of dropout. I would be extremely disappointed if I were to compose presentations only to later be deserted by my audience.

People who cannot afford a nominal fee face an additional problem. One must have savings in order to trade. I would probably suggest opening at least a $10,000 account to learn. I would expect interest to wane for someone unable to open a real account. Discouragement would build when trader education could not be converted into actual profits.

This is strike two against giving back to those without means. First, no fee means no front-loaded motivation to get through the course. Second, no savings means no application for the education itself.

I recently messaged people from Meetup asking if they would be interested in a trader education group. I suggested monthly meetings with a charge of up to $20 per meeting to cover expenses and to establish some accountability. From 54 messages sent, two said they would be interested, one person was a definite maybe, and eight declined.

Of the eight who declined, two said they wouldn’t pay $20 per meeting. This could also be a reason more people did not respond. While it may be healthy skepticism toward a stranger, I doubt anybody could find a complete curriculum delivered by a full-time trader for less. And what they don’t know they don’t know is that offering this for free would be doing them a greater disservice.

Giving Back (Part 1)

Over the years I have found little interest among people in learning to trade options. I am thankful for what success I have had with my trading and for the freedom my entrepreneurial trading business affords me. I have given significant thought to how I might be able to “give back” as an expression of my gratitude.

I want to begin by addressing a potential contradiction between giving back, which implies free, and teaching people to undertake a for-profit enterprise. As an inextricable component of the tremendous business opportunity I have cultivated for over nine years, I believe trader education is extremely valuable. Maybe this is not something to be given for free lest its value be undercut. With the domain being strictly financial, an upfront investment seems more fitting with the goal of consistent profit over time. No investment is free and therein lies the contradiction.

I perceive a significant difference in subject matter between offering people what is essentially business training (trader education) and volunteering to tutor after school kids. I also believe the story would be different if the trader education were used to generate profits for charity.

Perhaps academic scholarship can help determine whether trader education should be free or for sale. Scholarships are generally awarded based on need or merit (i.e. achievement). The latter often includes people who would not otherwise qualify based on need. If I want to give back, should I teach financially-challenged or high-achieving individuals?

I believe consumers of expensive trader education services are more likely to stick with the program than those without obligation. I have previously discussed how traders can be a very fickle lot (myself occasionally included). Over the years I have seen people come and go through various Meetups and trading groups. This stands in stark contrast to many students I have seen motivated to complete programs for which they paid a hefty bill up front.

With many trader education programs costing thousands of dollars, people who attend are generally not those in need.

To whom should I “give back?” Score one point for merit-based because those with nothing to pay are lacking a key motivator to get through.

I will continue next time.