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Our Social Blind Spot

Why do we tolerate investment ignorance?

Don Phillips, 04/08/2013

A few years ago, I watched an American television journalist sigh after a colleague reported on a financial story and utter words to the effect that she could never understand finance—interest rates and yields and inverse relationships, she opined, were simply too confusing for her. It was intended to be, and was taken by her colleagues as, an amusing foible. For in American culture, it’s considered quaint and even mildly amusing, and certainly not a matter of shame or potential embarrassment, that a mature adult should turn a deaf ear to financial issues.

Why do we tolerate investment ignorance when we frown upon inattention to other matters of adult life? If this same host had professed an inability to understand politics—how can one possibly grasp three chambers of government and two parties and the electoral college?—she would have been soundly chastised and possibly disciplined by her employer. Similarly, if an adult declared football as simply too difficult to grasp, what with its three-four defenses, nickel packages, and blitzes, the person would be thought deficient and possibly ostracized from some social circles.

We regularly master subjects that are every bit as difficult as investing, for failure to do so would be seen as a personal, professional, or even a moral shortcoming. Why of all things isn’t investment literacy on this list of expected competencies of American adults? Surely, an ability to save intelligently for the future, to secure better protections and opportunities for oneself and one’s loved ones should be near the top of the list of expected adult competencies. Yet, we find in practice that it is not, and this failure of expectation is at the root of our nation’s inability to invest with discipline and competence, a shortcoming that limits our personal and national potential.

I say our national potential because our politicians either suffer from or exploit the same blind spots that plagued this TV journalist. The recent debate surrounding taxes contained references to tax preferences for capital gains or dividends as tax breaks for the elite, despite the clear evidence that dividend and capital gains taxes are progressive, rising from 0% to 15% to 20%, and now to 23.8%. Articles about rising incomes for the 1% declared that group’s unfair advantage because they participated in the stock market’s strength while the middle class supposedly could not. Why do we depict investing as something only the elite can do, rather than as an expectation of all adults? I started investing with paper route money as a teenager and saved money for investment ever since my first Morningstar paycheck. We should not excuse a failure to set funds aside for the future as an expected outcome for the middle class. Rather, it is, in many cases, a simple human preference for the immediate gratification of spending over the deferred benefit of saving.

Of course, politicians have often been the worst practitioners of a live-for-today philosophy. Why worry about pension promises that won’t come due for decades if they can get you re-elected today? In my hometown of Chicago, we’ve disgracefully sold off decades’ worth of parking revenues for a pittance of their market value in order to create what our former mayor declared to be a “rainy day” fund. When asked two years after the foolhardy deal why the money had already been spent, the mayor responded, “It was raining.” Selling long-term assets to meet short-term obligations is a disastrous fiscal course. Sadly, it’s the role model too many of our politicians create for us. While the citizens struggle with the aftermath of these deals, the politicians move on to lucrative positions on corporate boards or at law firms to exploit their government contacts. One can only hope that they’re not spreading their financial wisdom to these new entities.

Ultimately, we’re responsible for our own behavior and the consequences of the damage the officials we elect do by incurring massive deficits and making dumb financial trade-offs. Our own tolerance of financial illiteracy makes us vulnerable both as individuals and as a society. The mathematics of investing isn’t that difficult. We owe it to ourselves and our communities to get smarter about investing, to stop thinking of finance as too daunting, and to stop letting politicians exploit our collective naiveté. A working knowledge of investment fundamentals shouldn’t be exceptional; it should be the expectation of all adults. Failure to do so leaves us vulnerable to the worst aspects of Wall Street, to short-sighted politicians, and to our own base instincts. It’s tempting to live the carefree life of the grasshopper, to cherish immediate gratification and not plan for tomorrow. But it’s the ants who build a strong society because they prepare for the future by consuming less than they have today.

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Don Phillips is a managing director of Morningstar, Inc.

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