Financial Literacy: How well do you understand the ABCs of your personal finance?

A man and his ever-nagging wife went on holiday in Jerusalem. While they were there, the wife passed away. The undertaker told the husband: “You can have her buried here in the Holy Land for US$150 or we can have her shipped back for $5,000.’’ The husband thought about it and told the undertaker he would have her shipped back home. The undertaker asked him: “Why would you spend $ 5,000 to have her shipped home when you could have a beautiful burial here, and it would cost only $150?” The husband replied: “Long ago, a man died here, was buried here, and three days later, rose from the dead. I just can’t take that chance!”

So how is your financial literacy? These days financial literacy seems to be the buzz word among regulators, politicians, non-governmental organisations and the media. According to the Financial Literacy Survey that was conducted by the Financial Consumer Protection Centre of the Bank of Thailand in 2013, the financial literacy level of Thais was below the average score of 14 countries that participated in a survey by the Organisation for Economic Cooperation and Development. Essentially, there were three main components in the central bank survey: financial knowledge, financial behaviour and financial attitude. As was expected, low income and education levels are correlated with lower financial literacy scores. In particular, a rather large number of Thai people do not fully understand compound interest calculations, deposit protection policies, and the concept of the time value of money.

In addition, Thai people have low financial behaviour scores on “being responsible and having a household budget”, with 93.5% of respondents receiving a zero score. Another behaviour with relatively a low score is “making informed decisions and comparing information before purchasing financial products”, with 47.7% of respondents not making an informed decision nor comparing information before purchase. Behaviour relating to a positive attitude towards saving for the future rather than spending also fared poorly in the survey.

Not surprisingly, enhancing financial literacy has become a proactive financial consumer protection policy. It is hoped that once individuals attain good financial knowledge, they will change their behaviour and be able to manage their personal finance effectively. Only time will tell how successful these initiatives will be. But to be frank, I am not optimistic. Even in a mature market like the US, people are still clueless about financial literacy. According to a recent research by Dalbar, a Boston-based market research firm, the average investor’s return is significantly lower than the market indices. Over the past 30 years, the average US equity investor earned only 3.7% per annum in the funds they invested. Had the investor invested in the S&P 500 index, the returned achieved would have been 11% per annum. Why is that?

Dalbar pins the blame squarely on financial services firms, which speak jargon that simply has not registered with most investors. For most people, terms like “beta”, “correlation”, “standard deviation”, or even asset allocation and diversification are all Greek to them. Many investors do not even understand what “buy and hold” means. So dropping the jargon and speaking plainly may just be the first step of what is sure to be a very long journey. That is why despite their weaknesses, low-cost target-dated retirement funds with automatic rebalancing, dividend reinvestment and regular contributions withheld from pay cheques still remain a good solution for many people.

Teera Phutrakul is chairman of the Thai Financial Planners Association.