Long-term Investing

Open to Debate: Are Americans financial dummies?

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Americans are financial illiterates. Right? Know the difference between a stock and bond? Maybe. Between a bond price and bond yield? Now, c'mon.

It's widely assumed—and supported by surveys of average Americans—that financial illiteracy is at the root of our inability to spend and to use credit wisely, and to save enough for milestones. But could the real problem be that we're drowning in too much Wall Street jargon?

In this new series, Open to Debate, we ask individual investment experts to weigh in on everyday financial issues, beginning with the most basic: How low is the American financial IQ? And is it because of a lack of financial education or a glut of marketing literature discussing alpha and beta? (For work stress relief, we also let them vent about their least favorite bits of financial jargon.)

Ed Gjertsen II, vice president of Mack Investment Securities, CFP

America is not devoid of financial literacy; I believe we are drowning in it. There is enough information for individuals to make decisions. The challenge is that the financial planning profession needs to do a better job of connecting the information to the individual in a straightforward, jargon-free zone.

It is often stated that America has an obesity problem, yet I am pretty confident that most people know or have heard of the four major food groups and understand that if you eat less and exercise more you may become more healthy.

One way to develop good financial health is to consume less. Consumption is at the root cause of most issues. Too much consumption can be detrimental to one's health, whether physical or financial. It comes down to choice: to buy or not to buy. Conscious consumption (not in the social sense) should be an important element in our day-to-day decision-making. We swipe without much thought.

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Gjertsen's least favorite financial jargon term?


I strongly dislike this word because it resonates of diet. Diets are restrictive and guilt ridden. I would prefer "eating plan" or in this case having people embrace a "spending plan." If I watch what I eat and plan my meals but every so often break down to enjoy my milk and cookies (personal favorite), I shouldn't feel guilty about it. If I develop a spending plan and consciously know where money is flowing, I shouldn't feel guilty about falling off it. Less guilt, more flexibility but, most importantly, treating people like the intelligent adults they are.

Ric Edelman, chairman and CEO of Edelman Financial Services

Yes, Americans are really financial illiterates. But Wall Street doesn't help and in many cases makes it worse.

There are three potential resources—parents, schools and employers—and few in any of these three categories do a good job. Few parents discuss money with their children, a small minority of states require any financial education courses K-12, no college that I'm aware of requires undergrads to take a personal finance course (unless that's their major) and employers generally provide little more than basic information about employee benefits. The media tend to highlight scams and losses, convincing ordinary Americans that investing is risky and no one in the financial services industry can be trusted.

Many in the industry—from insurance companies, banks and credit card companies to financial advisors, stock brokers and insurance agents—use jargon to intimidate and confuse consumers. Talking in code makes it hard for them to ask good questions or evaluate the answers they get. This leads people to feel intimidated and anxious, and less likely to succeed in their desire to achieve financial success. The result is that millions of Americans reach retirement age with few assets and massive debt—a crisis not only for them but for the nation.

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Edelman's least favorite financial jargon term?

I have lots of least favorites, in no particular order:
Equities. Why not just say "stocks"?
Net asset value. How about "price" instead!
Basis points. Can we refer to percentages, instead (btw, most people don't understand percentages, either!).
Viatical settlements. Puh-leeze.
Longevity insurance. Aka annuity! Annuities—every aspect of them. There are too many kinds (fixed, immediate, deferred, variable, equity-indexed) with too many convoluted features (GMIB, GMWB, GMAB). The least-friendly consumer product ever.
Alpha and beta. Can we just talk about risk?
Estate planning. No one in America believes they have an "estate," and therefore they erroneously conclude that they don't need it (as in "only the Rockefellers and Kennedys need estate planning!").
Playing the market. Bright idea to get Americans thinking it's a "game."

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Lena Haas, senior vice president of retirement, investing and saving at E-Trade Financial

Consumers try to absorb the jargon and they give up. It's a major roadblock. This is especially crucial for women. Many feel left behind because of overly complicated, male-focused jargon.

The goal is to translate the jargon into what it means for the investor—in terms of their goals, emotions and lives. You have to ask "so what?" To take more control of your retirement savings you don't need to be a rocket scientist and work through complex software. It can take as little as 15 minutes of reading or watching a 3-minute tutorial to make you a ... a little more educated and empowered when it comes to your investments. It's about incremental, manageable steps.

The next step is, what do I do with this information? What do I invest in? Discussing modern portfolio theory may cause a customer's eyes to glaze. But talking about setting up a portfolio with a core set of investments for long-term growth and a satellite set of investments for more active investing is a manageable discussion. It's the same concept, just framed in more understandable language.

Another example is theme investing, which takes the simple concept of "invest in what you know" and puts a technical analysis spin on it. You invest in the trends you know, which take into account the larger market conditions that are usually the stuff of sophisticated market technicians.

Haas' least favorite financial jargon term?

Rollover .

A rollover marks an important event—when you've changed jobs or are starting retirement. This should be exciting! A rollover doesn't communicate that. A rollover is something a dog does, or is what a person does when they give up.

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Barry Glassman, president of Glassman Wealth Services

Many people are financial educational-hindered, but many spend more time on golf lessons than retirement education. Even if you want to be financially educated, it's a lot of mixed messages in the resources and hard to decipher the right message amid the jargon and differing opinions.

The basics aren't being taught, and people don't seek out more substantial information until they're much older. Spending less than you make, balancing a portfolio and tracking returns to know if you own the right mix—those aren't taught.

The good news is that 401(k) providers, which are typically an individual's first experience with investing, are providing a lot of value and content—diving into lifetime income without selling anything more than the idea that you should save.

Hopefully more schools and colleges will offer courses and more parents will teach their children, but outside of that, it's unlikely that a 27-year-old will take a personal finance class. We are financially illiterate by choice, but there is no set path for tapping resources—many of which are also selling something.

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Glassman's least favorite financial jargon term?


I'm not sure people understand what that means. I think people believe diversification is owning a lot of things, but lots of those things move in lock step during different times.

Last year was a great example. Diversification outside the U.S. didn't do as well as if you were all U.S. equities, so more and more people were doubling up in small- and large-cap and truly not diversified, something they will learn quickly and painfully if we see another '08 or downturn like the summer of 2011. It's the most overused term, rather than "least favorite," but you could also argue it's the most underused because few understand it.

Add your two cents on America's financial IQ in the comments section below (which is hopefully not full of Wall Street jargon). You may have a valuable insight for fellow investors, learn something from them—or both.

By Eric Rosenbaum, CNBC.com