Another way to explain investment literacy is to indicate the signs pointing to the lack of it. By indicating what it is not or explaining the opposite, we may be better able to explain what it is and see clearly its meaning. Having explained what investment literacy is all about in previous post, we now turn to the telling signs of lack of investment literacy.
There are four telling signs of lack of investment literacy and these are:
1. Inability to save.
This is the first and the most glaring of the telling signs. With a person’s inability to save, one cannot even speak about investment because there is nothing to invest in the first place. This is true whether one has high or low salary because savings is ultimately a result of mental attitude, understanding and discipline.
Of course, it is true that in general, the higher the salary the greater the ability to save but this is not the determining factor. The determining factor is the perception and understanding and discipline to carry out what one understands on what it takes to save.
2. The tendency to get lured towards impossible earnings schemes
Throughout the years there has been a plague that kept on sweeping the land and victimizing people from all walks of life. This is the plague originated by Mr. Ponzi, the classic pyramiding scheme. This has kept resurrecting through all these years as if Mr. Ponzi rises from the grave like Dracula to wreck havoc and suck the financial blood out of the innocent and uninitiated. Each time, the scheme never fails to leave a swath of impoverishment to hundreds, if not thousands of victims. In 1997, the government of Albania fell as hundreds of thousands of victims, impoverished by the widespread pyramiding scams, blamed their government for the fiasco.
The legendary investor John Bogle, founder of the Vanguard Group of Mutual Funds, once remarked that any return on investment beyond 15% per annum should better be considered “found money”. While this may not have to be taken literally, it simply is better treated as a “caveat” which means that investors should be wary of investment schemes promising fixed returns of more than 15% per annum (approximately double-your money in 5 years).
Thus, if one happened to get lured to any of the “Legacy-like” schemes which promised double your money in 2 or 3 years, one is simply not investment literate.
This is the most obvious of the telling signs. The fact is: one gets victimized by any of these schemes simply because he is not literate in investment. A person who is literate in investment simply sees immediately that any scheme offered is within the purview of “impossible earnings”.
Having said this, I have to qualify that the 15% mentioned above only applies to fixed returns. This does not include schemes that do not offer fixed returns like investing in stocks or mutual funds. We will turn to such type of investments in later postings.
3. The tendency to accept unwanted risks and burdens
People who can save some amounts from their earnings/salaries in view of higher-than-usual earnings rate, have the tendency to accept additional risks and burdens without much thought. The risks and burdens may come in many forms. It usually comes ironically from friends and relatives who have lower earning capacities and who saw the OFW relative as an ideal source of low-cost or free equity funding.
Thus, an OFW may easily find that friends and relatives back home (not members of his own immediate family) suddenly become business-minded even without the slightest training, orientation or knowledge of the type of business or of the inherent risks involved or of the economics of the business or industry. The most favorite is the transport business (taxi, fx, jeepney business) or agriculture-related like piggery. The project proponent usually does not have a modicum of a business plan, let alone a feasibility study.
The typical OFW finds it extremely difficult to turn down such proposals simply because, not being literate in investment, he does not understand the risks involved and has no clear theoretical foundation or “anchor” to base his decisions. Furthermore, he fears that the friend or relative may feel bad or get angry with him if he turns him down. Many an OFW faced such predicaments and relented out of “hiya” or fear of the other party feeling bad. The OFW then invariably suffers the eventual loss.
4. Business mentality
The OFW often assumes that after his stint abroad or after having accumulated some amounts after his stint abroad, he should go into business. This mentality is extremely prevalent and it is simply assumed that the next stage for an OFW is to be a businessman of sorts. Ironically it is the government itself which wittingly or unwittingly, has become a key purveyor of such mentality. I remember a key politician visiting Riyadh a few years back exhorted the OFW community to become businessmen.
Business mentality is a “tunnel vision”, a narrow thinking that assumes business as the only desirable path an OFW should take after his stint abroad.
The fact is that business is not for everybody and there are alternatives for OFWs which are much easier to succeed with than getting into business. It is extremely difficult to succeed in business while it is fairly easy to protect ones savings and obtain reasonable earnings with due diligence study of alternative instruments available, some of which are even available in one’s neighborhood.
For instance, the OFW can invest in the 5-year time deposits offered by some reliable savings and development banks which, just a few years back elicited gains of as much as 10% per annum. For the more advanced, there is another alternative the Philippine mutual funds some of which have fairly commendable track records. The point is, there are alternatives from going into business but alternatives are usually beyond the thinking range of OFWs having been deeply conditioned in business mentality.
Lest some readers may misinterpret that I am against OFWs going into business, I have to add here that going into business is a desirable option for OFWs who are willing to spend a great deal of time and effort studying and preparing themselves into going into business. This will be a subject for future postings.