With our time spent between 5i Research and Canadian MoneySaver (one of very few Canadian personal finance magazines still publishing in print), financial literacy is by default one of the driving missions behind both businesses. Both the investment research service and personal finance magazine strive to teach our readers about financial principles, help them understand that investing and saving does not have to be difficult or scary, wealth-building strategies are not just for the ‘rich’ and the earlier one starts investing, the better. So in November, which is designated Financial Literacy Month, we announced a scholarship competition for high school students across Canada, which kicks off on January 16^th, 2017. As we have been spreading the word and thinking more about the topic, we have encountered some interesting realizations and pitfalls surrounding the conversation on financial literacy.

Something better than nothing

The structure of the scholarship is simple. It is a three-month stocksimulationcompetition whereparticipants invest a fake money portfolio. The top 15 portfolios are then asked to submit a brief report on their portfolios and strategy, as a means to weed out some of the more speculative or just plain lucky portfolios. The intention is to get students at a young age thinking about investing, experiencing the power investing can have on your wealth and getting a conversation started amongst teachers, classmates and even families. It was surprising to us when we received some criticism for the initiative, however. Some of the comments were helpful and sincere while others were just critical for the sake of it but the general theme was that a three-month stock competition is bad because it encourages short-term trading and speculation.

Is it perfect? No. Is it enough to get someone to look further into investing and thinking more about it? Probably. Is the short-term nature going to turn participants into online poker players? Unlikely. We have always been proponents of long-term investing; unfortunately running a 30-year stock simulation competition is not realistic. This is a pitfall we often see when talking about financial literacy and investing in general. Everyone is always looking for the perfect solution in an imperfect field. There is no right or easy way to begin learning about finances but doing something to learn is almost always better than doing nothing. Being concerned that a short-term stock simulation teaches bad habits misses the point that you gained a good habit (saving and investing) before even being able to form the bad habit in the first place.

Missing the forest for the trees

A recent article we saw in The Globe discussing target date funds being for people who were too young caught our attention recently. The gist was essentially that 13 was too young to start worrying about investing and kids have other things to deal with. Fine, let kids be kids, but criticizing products that encourage long-term investing at a young age (or their parents to invest for them at a young age) is probably barking up the wrong tree and discourages the right kind of thought process. We don’t mean to be overly critical of this specific piece, but it is a great example of missing the forest for the trees in our view. Investing early, even if it is done 'imperfectly', is still better than not investing or saving at all.

Using sticks instead of carrots

We have seen a lot of this. There really is a lot of resources surrounding personal finance but it faces two problems: You have to know what you are looking for (you don’t know what you don’t know) to even begin and second, that the content is not fun. Investing and saving, while simple math, is still math and people are not going to go out of their way to learn about it, at least until they really have to. A lot of the material out there seems to be very passive where groups hope younger generations stumble across the information. This is why we felt using more of a ‘carrot’ through the scholarship award would be more effective than simply creating a web page with some information on it. 

Overcomplicating it

It is easy to quickly go down a rabbit hole when talking about investing and personal finance. Want to buy a stock? Well what account type are you going to put it in? What brokerage are you going to use? Are you active or passive? Should you pay off debt first? The list goes on and each answer can lead to more questions. This leads to a huge disincentive for any one to take a first step, as the process seems so daunting. What often gets missed here, we think, is that the earlier one starts investing, the less mistakes will matter. Making mistakes while young are important for three reasons:

1)   The size of the mistake is likely to be less when you have little money at a young age vs. a lot at an older age

2)   You have more time to bounce back from a mistake at a young age

3)   Early mistakes offer the opportunity to learn so they are not repeated later on  

So, by all means when you’re starting out, go and buy a high cost mutual fund. If that is what it takes to get someone started with investing, that’s great. Then as time goes on, the individual can learn more, try out different strategies and deal with the more complicated and nuanced things as comfort and knowledge grows. The important part is being invested as early as possible. The rest can work itself out later. 

Go easy on the ‘long-term’ when selling the idea of investing to your kids or students

Is investing all about the long-term? You bet. Is trying to convince a 15 to 18 year old that saving money today so they can enjoy it in 40 years the way to get them interested? No way. Showing the long-term impact of compounding is a key lesson in personal finance for everyone but doesn’t need to be the only one. There is very little conversation about how appropriate saving strategies can still help people enjoy the shorter-term needs in life. It can help someone afford a car, go on trips or pay for school. Saving is important, but we also often forget that spending it (wisely) is just as an important part of the equation and often much more fun than waiting 40 years until you can see it.

Regardless, we are looking forward to updating you on the winners of the stock simulation in a few months and if you know a student that may want to participate, please feel free to share. Deadline to register is January 15^th.

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