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Blogs - The Product Guru
Market Rises, Confidence Rises, Financial Literacy Plummets
Bank Investment Consultant
Thursday, December 16, 2010
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With all the angst over the slow recovery and the high unemployment rate, your clients could be forgiven if they didn’t realize just how well the markets are doing. Stocks are up, hedge funds are up, even bonds are slightly up for the year. And investor confidence, at least according to some surveys, is up.

The S&P 500 has increased 8% for the year, and the Wilshire Total Market index is even better, having surged 10.1% year-to-date. And hedge funds are up 7.8%, according to the Dow Jones Credit Suisse index. Even bonds have posted gains in the midst of all the uncertainty hovering over the economy. As tracked by the Vanguard Total Bond Market Index Fund, fixed-income is up 1.44% for the year.

And as for investor confidence, according to the BofA Merrill Lynch Survey of Fund Managers, 44% of respondents said in December they expect the world’s economy to strengthen next year, particularly in the United States. A month earlier, that was just 35%.

All things considered, this would seem to be a good time to be an advisor (when everything goes up, you’re more likely to be a genius in the eyes of clients.)

But there’s the nagging issue of a lack of financial know-how on the part of the general public. I’ve written on this issue here before, but just last week FINRA launched an interactive web tool that really illustrates just how lacking many Americans are in financial knowledge. Just a few minutes on the site will show you that 20% of all American households have spent more than their incomes over the past year. (You can also view the data by state or by broader geographical region.)

It also shows that 60% of Americans have no type of emergency savings, a “rainy day fund,” to help cover unexpected expenses. I would guess that group overlaps a great deal with the 62% who do not comparison shop when looking for credit cards.

But the most telling part of this new online tool is the five-question financial literacy quiz, and the fact that the average score was just three correct answers.

All of which brings up the question: Who exactly are the people feeling so confident about the markets? Are they the same as the people who aren’t saving anything and failed a (very easy) financial literacy test? The various confidence surveys are obviously testing samples of the population so it could be happenstance that they’re just not talking to the people who are spending more than they’re saving. Or it could be a case of people having a misplaced sense of general optimism while they’re own predicament is declining.

To be sure, the people who are spending more than they earn are not your clients for the most part. But this overall concept is simply human nature, and it could apply to even high-net-worth investors. Even your clients could be overly optimistic, or too pessimistic for that matter, in certain markets.

It’s up to you, as their advisor, to help them improve their financial decision-making. With your help, they need to figure out their true level of confidence and then not get swept away in a wave of popular sentiment. If they have a true change of heart about their portfolio, that’s one thing. But they need your help to stay on track and not get carried away on either end of the spectrum.

 

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