In very simple terms, financial education can make the difference between making a good and a bad financial decision. Why does it matter now more than ever? Because we are in a relatively good business and economic environment. That’s a good thing, right? Yes, of course. And that is relatively surprising given that we are still in the midst of a global pandemic…
Eveybody is a genius in a bull market
The time to repair the roof is when the sun is shining
John F. Kennedy
When anything and everything goes up, everybody is a finance genius. Which has been pretty much the case for a while across most asset classes. And particularly over the past 18 months.
Last year was the shortest bear market on record. So you can pretty much assume that we have been in a bull market for a very long time.
What does that mean in practice?
It means that you could have gone all in on a (meme) stock or a particular cryptocurrency – that will remain nameless, but it starts with a B… and that’s not Britcoin – and made a killing. Therefore, you might believe that you are making good financial decisions…
No offence to your investing skills, but in all fairness, a monkey throwing darts at a board in the dark would have done the same.
Anyhow, that is a problem because one forgets the basics of finance when one thinks he is Gordon Gekko.
Fundamental things like portfolio diversification, risk-adjusted returns, leverage…
When the music stops
Only when the tide goes out do you discover who’s been swimming naked
Warren Buffet
What is going to happen when the music eventually stops?
Because, everything being equal, bull markets always come to an end. The music eventually stops. That is when you have a pretty serious financial crisis, the value of speculative assets fall rapidly as everyone runs for cover… and you hit some kind of bottom. That is nothing to be particularly afraid, as it is a very natural process.
You can go back a fair amount of time and discover a number of crises that have happened at regular times. Like in this excellent article on the five financial crises that shaped modern finance by the Economist.
Financial Education starts now
There are no particular excuses when it comes to financial education. You are starting where you are starting, and that is perfectly fine. But you need to start somewhere.
Go through the basics, and build up knowledge over time. Read articles and blog posts, watch videos or take up online courses.
Make up your own mind by getting as much as possible knowledge from reputable sources. Do not listen to the gurus and their shortcuts, methods or whatever Ponzi scheme they are trying to sell. There are no shortcuts, it takes time to build the right knowledge. And there are no bullet-proof investment strategies.
Fintechs and more broadly people in the industry also have a duty to do much better. Not pointing any fingers… but if you purposely push financial products to people knowing fair well they do not understand… or that it is bad for their financial health… shame on you!