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By Aman Raina, Investment Coach, Sage Investors
Special to the Financial Independence Hub
My motivation in starting my own practice to teach and engage people on investing revolved around financial literacy. I thought that if I could improve someone’s financial literacy, they will have a better chance at becoming a successful investor. I was always a big supporter of financial literacy programs, especially in schools. It made sense and I thought it was the right thing to do.
The reality is over the years I’ve learned and witnessed first-hand that while noble and done with good intentions, financial literacy programs just don’t work. A revolving door of programs, a lot of them government and industry sponsored have been rolled out over the years, starting out with enthusiasm and then just petering away in obscurity.
Here in Canada, we even have a Financial Literacy Commissioner , which acts and cheers Canadians into becoming more financially literate but to no avail. We even have a Financial Literacy Month late every year: So much effort, again all with good intentions, will be put into improving financial literacy but it just doesn’t seem to stick.
Millennials scared of investing
So queue the latest attempt at cracking the financial literacy daVinci Code. A 42-page report commissioned by the Ontario Securities Commission, prepared by a dream team of consultants and personal finance thought leaders. The report attempts to answer why people, specifically Millennials, are not investing and what financial institutions can do to get them to invest.
The report does a good job of capturing the pain points of why Millennials are not investing. They’re scared of investing. They feel overwhelmed by the process. They often freeze when trying to make a decision. They don’t know how to start and take that first step. I hear these thoughts very often from people I’ve worked with, and not just Millennials.
The report outlines some broad solutions and strategies that financial institutions could adopt to better engage the Millennial cohort. The problem is the solutions are drowned out in consulting jargon and don’t effectively address those pain points that people are consistently complaining about. Often I’ve seen many programs rolled out that don’t articulate a clear, consistent message that speaks to the pain points. Here’s what OSC report came up with:
Make Investing a Priority
This is an attempt to address the pain point of establishing the first step into investing. The report believes that the first natural step to expose people to financial concepts is in the classroom. Teach the concepts early on, maybe high school and it plants a seed that will carry them into adulthood.
It seems like common sense. Ontario high schools have just started rolling out a financial literacy curriculum. The problem is it’s been done and it doesn’t work. A study published in the journal Management Science by John Lynch, a consumer psychologist at the University of Colorado’s Leeds School, compiled the results of more than 200 studies of financial literacy programs, adjusting for subjects’ family background and personality traits that had been ignored in the previous research. The study found that studying financial literacy has a “negligible” impact on future behavior and that within 20 months almost everyone who has taken a financial literacy class has forgotten what they learned.
Students don’t retain the information. The reality is the information during that period in our lives goes through one ear and out the other. It’s just not a priority…at that time. The report cites an excellent example by one of the participants, who said “at 15 years I’m thinking only 3 months ahead and when I got to 22 years, I was thinking years ahead”. Teaching financial literacy in high schools intuitively makes sense, but at that age, we’re not thinking about the future. The future for me at that age was thinking about what I was doing after school on Friday with my friends. I’m not a psychologist but I think Teenagers aren’t wired for it. Their brain is still developing. It’s only when people experience adversity (i.e. living on their own, managing their paycheque for now and the future) that motivations for improving their financial knowledge crystalize.
Validation by Social Circle
The report suggests getting out to where Millennials are hanging out and engaging them about the importance of investing. The thinking is Millennials are more likely to follow what their peers are doing. If their friends have accounts with Robo Advisors then they are likely to set up their own Robo Advisor account.
The report suggests that peer pressure is a big factor in holding Millennials back from investing and will engage in activities that their social circle has endorsed. Those types of validation, confirmation behaviours and conversations are apparently happening in social media platforms so that’s in theory where the industry needs to be.
Setup those Facebook Pages. Tweet about all things investing. Gram those stock charts. Engage in those conversations. Technology will get Millennials into investing. The problem is technology is calibrated to appeal to the masses and not the individual. Investing is a very individual and intimate skill and the reality is people are in different spaces and have different priorities and time commitments in their lives.
It’s a big reason I’ve avoided so far teaching large groups of people and instead focus on one-on-one collaborations where I can customize the teaching. I can see the progression of the student. The investing path is either one we travel on our own or at most a family one, and does not require validation by a social circle because our priorities and circumstances are our own and not owned by the community.
Just make it easier
This is an attempt to address the pain point of fear people have of investing. Many think of investing as going through stacks of charts and spreadsheets, learning complex formulas and ratios. Investing is math for a lot of people and a lot of people hate math. The report suggests that investing should be made easier and the best way to make something easier and palatable is to make it fun! Again the report suggests technology as the enabler.
Here’s the thing about investing and this is coming from someone who teaches this stuff. The process of evaluating an investment, be it a stock, bond, ETF, or GIC is a very dry, repetitive and frankly boring process.
For every company I analyze, I am following the same series of steps and it can be quite monotonous after a while. It requires a time commitment to understand the mechanics and behavioral aspects of stocks. You can try to sugar coat this with an app or an Instagram story or podcasts; however, at the end it is the material and concepts that will drive it and that material can be pretty dry to someone who may not be into math or have an analytical thought process.
Investing is hard work
Investing is hard work. The whole financial services industry is built on this value proposition. The industry tells us that investing is hard but we have a lot of trained people who know this better than us so we should trust them with our money. The industry is caught in a conflict because if they do project investing to be easy, people will be less likely to use their services. Making investing easier is easier said than done.
Address Failure: Fake investing
The report suggests appealing to the Millennials’ fear factor of investing as well as their inner-snow flake (which I think is a ridiculous stereotype) by offering them to test drive and experience investing through sanitized, simulated trading environments.
While this may allow people to practice the mechanics of executing a transaction by tapping a bunch of buttons, it does little to make them understand the concept of risk and reward when making investing decisions. It does little to help them learn how to evaluate an investment opportunity.
From my experience, these type of simulations and “contests” encourage people to invest in riskier assets than within their risk tolerance level. Should they be successful, they can get a false sense of security when they go real-time with real money. This is fake investing and it does not even remotely come close to capturing the behaviours and emotions they will come into contact with.
The reality is when you are investing with your hard earned savings, you pay attention. Your guard is up and you make decisions more carefully and at some level more thoughtfully. The fact that you can lose money buying stocks is a fear factor you have to get over right away because it is going to happen. Count on it. Failure is an occupational hazard in investing and shielding people from this reality as the OSC suggests is doing more harm than good.
The OSC report had a great opportunity to address those investing pain points, but like so many financial literacy initiatives, the messaging is not clear, consistent, and understandable. The report identifies solutions, yet they are separate and not integrated and use a lot of industry jargon that people just won’t connect with. They emphasize processes over results. What is the outcome we want Millennials to achieve with investing?
In Part 2, I will offer some of my own perspectives and ideas that I practice with people I work with to help them better engage in investing.
Aman Raina is an Investment Coach and Founder of Sage Investors. Aman helps people who want to be achieve financial independence by teaching and engaging with them on how to make more educated and successful investment decisions so that they can achieve financial freedom with confidence.
Aman can be reached through his website (www.sageinvestors.ca), Twitter (@sageinvestors) and Facebook. This blog originally appeared on Aman’s website and is republished on the Hub with his permission.
