Advertisement

The importance of being financially literate

Financial literacy helps one to move from an ‘aggregated’ investment approach to a ‘segregated’ investment approach, wherein each goal is backed by a separate investment portfolio. Though it may not have a big theoretical backing, the ‘segregated’ approach is practically better as there is no overlap or spill-over happening from one goal to another. Along these lines, financial literacy helps to understand the risk based approach to investing, meaning that one should invest in less risky investments in the short term and target relatively riskier avenues like equity for the long term. This enables investors to benefit from their higher wealth creating potential for crucial goals like children’s education/ marriage, retirement, etc.

Unlike those who feel that equity markets are risky, a financially literate person would understand that one can invest in equities through unit trusts which are professionally managed. One can further reduce risk by increasing the tenure of equity investments to 5, 10, 15 or 20 years to reduce the chances of any negative returns. One also builds awareness about facts like ‘one must not time the market’ but invest in small amounts, regularly and over the long run. Time in the market can be more important than timing the market.

Challenges to the spread of Financial Literacy - The poor state of financial literacy in the country is evidenced by the fact that only a small percentage of South Africans regularly invest their savings in unit trust vehicles. The biggest challenge therefore is to change the investment psyche first from ‘physical assets’ to ‘financial assets’ and from financial assets from ‘assured returns’ to ‘market linked returns’. For example, a traditional savings instrument is predominantly debt oriented and declining interest rates would lead to a lower amount available on retirement which may not suffice the post retirement phase. It is therefore important to supplement provisioning for the future by regular savings in market linked investments like unit trusts funds which have the potential to provide higher inflation adjusted returns.

What is the solution?

Basics First - If we want our next generation to be financially literate, we need financial education to be part of the school and university curriculum. The basic lessons of investment must be taught in school/ university. Once again it is important that this is not a tick-box initiative as students must understand the basic nuances of investments so that they can take informed investment decisions in future to meet their life goals.
Technology and social media - can be a big enabler in increasing the ambit of financial literacy. The mobile phone could be the key driver for this change. All stakeholders could pool resources and encourage ‘fin-lit’ start-ups to help build scale. Technology can be used to spread financial literacy in a ‘fun’ way through games using mobile apps.

Public-Private partnership - Increasing financial awareness in a large and diverse country like South Africa will have to be a long term effort built on a public – private partnership involving the government, regulators, industry associations, financial sector players like banks, unit trusts, insurance companies and financial product distributors.

Simplified messaging – The communication to investors must be very simple, consistent and without jargon.

Conclusion - A well informed and fully aware investor base is important for a growing economy like South Africa as it fosters financial stability. While the Financial Services Board has its own financial literacy initiatives, we need many more hands on the wheel to build the momentum that is necessary.

Pages

Details

Advertisement


Advertisement