Technology Steps Up to Financial Literacy Challenges

Fun and financial reporting are rarely two things that go together (outside of MarketMinder, that is), but Ann Carrns at The New York Times gave readers a tasty treat on Friday: a delightful look at some of the apps teaching kids, teens and young adults about finance and investing. This wasn’t yet another dismal treatise on the dangers of the “gamification” of investing, whatever that even means. Nope, it was full of encouragement and cheerleading about private companies doing what many schools haven’t for the past few decades and making it fun in the process. To which I say, hear, hear! The more young people know about compound interest, saving, budgeting and the tradeoffs between risk and return, the better they can navigate markets, find and capitalize on opportunities and get a head start on their long-term financial goals.

Back when I was a youngster,^[i] schools attempted to teach a few core financial concepts. I remember lessons on compound interest and how to write a check when I was in fifth grade, along with a stereotypical stock-picking contest the next year. The compound interest lesson resonated, and I immediately started tallying how many baseball cards I could buy in 20 years if I kept all my money in a bank account yielding 5%.^[ii]

The stock-picking contest, however, did nothing but encourage speculation, heat chasing and other behavioral errors. The teacher divided the class into groups of four and handed each group copies of the San Jose Mercury News’s Business section from the past week. I suppose many of you had the same experience. With that and that alone at our finger tips, we were to pick a stock to pretend to buy—just one stock—and the group with the highest return at the end of the month would win. Most groups picked stocks they knew, like Disney. Mine picked CBS, solely because it was up 10 points the previous day, which seemed promising. I don’t remember who won, but suffice it to say, we did not learn the difference between speculating and investing. Nor did we learn how to research companies. Or diversify. Or manage risk. Or or or.

In retrospect, the best financial lesson for young people as I came of age was a 1987 episode of Good Morning Miss Bliss, which later became Saved by the Bell. In this episode, the titular teacher sought to teach her class about investing. As she put it: “Each year, my students chip in two dollars, and we buy stock. While they’re dreaming of riches, they have no idea that I’m teaching them about American business.” Presumably, some deep fundamental analysis went into the class’s decision to buy shares of a fictional airline, which delivered a nice short-term return when it merged with another fictional airline. But that wasn’t enough for Zack Morris, class clown and troublemaker in chief, who as usual needed money in a hurry. So he cajoled classmates to go behind their teacher’s back, sell the airline and invest in potato futures, which he read about in an investment journal. At first it went great, turning the initial investment into $6,000 in a few days. But then the bottom fell out, leaving the class in a huge hole because, as the kids eventually confessed, Zack had bought the potato futures “on margarine,” which—you guessed it—meant margin. Best of all, they had to take physical delivery of 3,000 pounds of potatoes because they didn’t sell the contract in time. Fanciful? Sure. But a decent object lesson in the dangers of mucking about in futures markets if you don’t understand them and making unidirectional leveraged bets? Heck yah.

However, surveys and studies abound showing that whatever we did to teach financial literacy when I was a kid, it broadly failed. The largest financial literacy survey, S&P Global’s FinLit Survey, showed only 57% of American adults are financially literate. They aren’t asking them to calculate taxable-equivalent yields on municipal bonds or poke holes in equity-risk premium logic, either. The survey is based on questions like, “Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?”^[iii]

Arguably, that problem has gotten even worse in recent years. One study from a couple years back found 100,000 incoming college students answered just 2 of 6 basic financial literacy questions accurately on average.^[iv] Yes, two of six!

That is why these new apps—and their off-the-charts popularity—are so darned refreshing! They aim specifically at young folks, eschewing long, dry essays and lectures for snazzy graphics and videos. They have fun quizzes and other features that reward users for learning. Kids learn how to make a budget. They learn the different ways to save. They learn how stocks work. They learn rudimentary security research techniques. If parents allow it, they can test their knowledge and research skills by buying actual stocks or funds, getting real-time lessons in risk and return. They even learn more advanced things like valuations.

Obviously, one could argue about the quality of this teaching and whether it reinforces market myths. In some respects, it probably does. But it is also unreasonable to expect every investing newcomer to immediately grasp the finer points of efficient markets, fundamental analysis and independent thinking—especially when their frontal lobes are still forming. Besides, it isn’t really possible to think independently about investing if you don’t know what the masses are taught. Expertise and creativity are next-level items. Why not start learning the basic building blocks early—and making it fun?

Inevitably, there are also some who grouse about some apps’ focusing on individual stocks rather than funds, worrying it encourages young investors to take risks. To which I say, isn’t that the point? There is a bizarre, borderline religion-like culture of safetyism that has taken hold of our society lately, and there is a wealth of survey data and anecdotal evidence showing it is hitting young people hard. Risk-taking is healthy and necessary to development, not to mention success in life, love, career and—yes—investing. Anything that encourages healthy risk-taking, with the requisite parental oversight, is good, not bad! It teaches resilience and coping with failure. It teaches that risk and reward go hand in hand. These apps’ parental involvement features can also help foster conversations to reinforce these core concepts.

Now, one area that we wish some app developer somewhere would spend more time on: Educating young people on how to do a better job identifying scammers. It is a tragic reality that, in this day and age, there are more scams on more fronts than you could ever imagine and, contrary to popular belief, many young people fall prey.

But regardless, if you have a young person in your life—be it your kid, grandkid, niece, nephew, godchild, family friend, what have you—the apps that do exist seem like a good way to get the ball rolling. Have a conversation and see if you can get them interested in the marvels of compound interest. Find a good app or two and show their parents how easy it can be to help their kids learn how to support themselves. Show how, in many cases, these apps are designed to spur more conversations between parents and children about investing. Parents will of course need to do their own due diligence to determine which of these tools (if any) are best for their family. But always remember: The more you know, the more you grow.