In today’s post, we explain in simple terms what investment literacy is all about by using first the computer literacy analogy. Then we mention in passing the risks involved, proceed to define and explain the basic elements, and explain the three (3) reasons why it is a “must” for OFWs. Finally, we touch on why we do not use the term financial literacy like most other writers.
Investment literacy can be easily understood as a term much like computer literacy. Computer literacy is a stage or level of proficiency that enables a person to effectively use the computer or more particularly, the PC. It is a basic skill that enables one to navigate on the PC’s myriad uses and programs that make work easy and make life in general, more exciting and more enjoyable.
In a way, the same is true about investment literacy. It is a stage or level of proficiency that enables a person to effectively use his income and savings to improve his economic well-being and enjoy life. The comparison ends there, of course. If a person lacks computer literacy, there is no risk other than his being unable to perform his job and losing it, or his being unable to communicate more efficiently and cost-effectively with kins, friends and acquaintances in far-away places of the globe.
A lot of micro/small businessmen I know still do not use computers and they seem to be doing just fine. The worst that can happen to somebody who is not computer literate is that he is not able to perform work in the easiest and most effective way. To a businessman, he will have to do his business in the old-fashioned manual and laborious manner. There is probably no actual risk of loss – only an opportunity loss, i.e., the opportunity to make things easier and faster and reduce cost in the medium-to-long term.
Well, the risk for lack of investment literacy, particularly for OFWs, is legendary. The most glaring is the risk of losing one’s hard-earned savings in ill-conceived investments and business projects, not to mention fraudulent investment schemes. One can be an OFW for 20 years with nothing to show for. There is even risk in doing nothing – the risk of inflation that can ravage the purchasing power of one’s savings.
Going back to the computer analogy, being computer literate makes one’s life easy and comfortable. By the same token, being investment literate makes one’s life easy and comfortable but, more importantly, one is able to provide a better future for himself and his family.
Investment literacy is defined by the OFW Investors Society (OFWINS) as the minimum level of knowledge and/or proficiency in the rudiments and principles of savings and investment as to result in the substantial improvement in the economic well-being of the person and of his family.
Inherent in the definition are two elements. First, there is a minimum level or a threshold of knowledge or proficiency required. Second, it results in substantial improvement in the economic well-being of the person or his family.
We need to elaborate on these elements. There is minimum level or threshold that has to be crossed if one has to be investment literate. For instance, one has to be able to save in order to be investment literate. If one is unable to save, then sorry, one is not in the investment literacy game. This is an absolute pre-requisite, a “condition sine qua non”, as lawyers say, to be investment literate.
The reason is plain and simple. One can never invest in anything unless he is able to save. No savings, no investment, period.
There is a body of knowledge or “understanding of reality” that makes one save. Without this knowledge or understanding of reality, one simply becomes hostage to the weaknesses of human nature. I refer specifically to the concept of “needs” against “wants” and the ability to distinguish one from the other. This is the cornerstone of the ability to save.
The second element of investment literacy is that it results in the substantial improvement in the economic well-being of the person and his family. If there is no substantial improvement in economic well-being, then there is simply no investment literacy to speak of. For instance, even if one is able to save, but he succumbs to what is being termed as “impossible earnings” schemes like investing in pyramiding schemes or gets lured to double-your-money-in-2 or 3-years “Legacy-like” offerings, then there will be no substantial improvement in his economic well-being. There will only be economic loss and resulting pain and anguish for him and his family. Again one is not in the investment literacy game in such a case.
Investment literacy and the lack of it, are practically day against night in difference. There is simply no comparison. And this has little to do with the level of income.
For OFWs, I should say that investment literacy is an absolute “must” and there are three compelling reasons:
1. Working abroad on borrowed time.
First, whether we admit it or not, an OFW is working abroad on borrowed time. Whether he likes it or not, one day he has to go back to our dear country and he often faces the stark reality of joining the vast army of the unemployed. Unless, he migrates, later to Canada or to the US but that is another story. If he is unable to save, then he ends up worse than before.
2. Fair game for unscrupulous persons.
The second reason why investment literacy is a must, is that OFWs and their families are known for having purchasing power and attracts unscrupulous people like flies getting attracted to honey. They are fair game and favorite target of schemers and all sorts of unscrupulous characters. A seemingly never-ending parade of Ponzi-like schemes stalk the OFW community in the Kingdom or elsewhere, viciously trying to part the OFW from his hard-earned money.
3. The tendency to acquire unsustainable lifestyle.
The third reason is that most OFWs and their families, by the constant flow of OFW remittances, easily acquire the tendency to splurge and adopt an unsustainable lifestyle. This is partly due to being psychologically unprepared and unable to cope with the sudden flow of purchasing power and partly, as a kind of psychological compensation in order to cope with the long-separation from loved ones. There are certainly deep psychological and social issues involved here but my main point is that investment literacy certainly and considerably helps one to cope with and minimize such tendency.
As a final point here, most authors and investment specialists use the term “financial literacy” instead of investment literacy. They mean the same thing but this author prefers to use the latter because it is more specific and less confusing. This author does not feel comfortable using the term “financial literacy”, since persons dealing with financial statements as part of their work are certainly considered financially literate. This author has seen many people dealing with financial statements but are unable to save or have been victimized by pyramiding schemes. It certainly does not mean they are literate in investment. “There’s the rub”, as Conrado de Quiros famous Inquirer column say.