Four key strategies for a brighter future

Based on the insights of some leading investor-education experts from around the world, here are four key strategies to improve your chances of having a brighter future.

Create a financial plan

It doesn't matter how much you have, it's important to chart your goals so that you can put in place the steps you must take to achieve them.

Even in countries where there is above-average investment knowledge, financial planning may be neglected. For example, in Hong Kong, where 35% of the population are active investors and fully two-thirds of residents save regularly, more than half of respondents to a 2012 survey said they believe financial planning is exclusively for multi-millionaires.

Gary Tidwell

"People do not have the concept of doing holistic financial planning," said Andrew Wan, chief financial officer and senior director (corporate affairs) of Hong Kong's Securities and Futures Commission.

This lack of awareness is especially harmful to people who are most at risk for making poor investment decisions. "The elderly and low-education and low-income groups demonstrate a lower understanding of financial matters," Wan observed.

Gary Tidwell, an IOSCO senior advisor whose responsibilities include education and training, has surveyed the online resources for investor education offered by 31 IOSCO members. He listed several key steps for successful financial planning:

• Manage debt. "The goal is really to eliminate debt," says Tidwell.
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• Prepare for the unthinkable. Contingency plans should include a safety net for job loss, sickness and health-care needs.
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• Save and budget. "Saving for retirement is a sacrifice," says Tidwell. People who don't cut their expenses and costs of living now may be forced to do so in retirement.
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• Prepare for transition to the next stage. For people in their working years, for example, financial preparation for retirement means transitioning from aggressive to conservative investments.

Use personal milestones as motivation

Addressing the needs of working adults, Canadian market researcher and psychologist Ed Weinstein said investors can use important life events as opportunities to learn more about investing and their own needs.

Ed Weinstein

"People are most teachable when they have to make financial decisions and they have to learn," said Weinstein, who pointed to starting a new job, getting married, starting a family and job loss as common triggers. According to Weinstein, there are roughly 40 such triggers in life. "Turning 50 is one that works very well in Canada," he said.

Weinstein, who has conducted extensive research on behalf of the Investor Education Fund, which is financially supported by the Ontario Securities Commission, said the information doesn't have to be complicated. In fact, simpler is better when it comes to investor education.

"People want to know just enough to make a decision they must make due to a life event and be comfortable with their choice," said Weinstein.

Don't ignore riskier asset classes

What do you think about an investment that, over a six-year period, delivered a negative annualized return of 8% while subjecting the investor to annualized volatility of 24%?

Although many would consider calling for a ban, suspension or warning for such an investment, the fact is, the cited performance is attributable to the blue-chip Euro Stoxx 50 Index, said Patrick Armstrong, an executive in the investment and reporting division of the European Securities and Markets Authority.

"Households in Europe are moving more and more of their assets into risk-averse assets, and away from assets that would be considered more in tune with long-term needs, such as savings for retirement," said Armstrong. While we may harbour a lingering mistrust of financial markets in the aftermath of the 2008-2009 financial crisis, staying away from equities altogether could result in investors failing to achieve some important goals.

Alexandre Vasco

At the same time, said Weinstein, investors can better protect themselves against financial failure by following five simple rules:

• Don't buy it if you don't understand it.
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• Don't buy it if you don't know what it costs.
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• Don't invest more than you can afford.
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• Don't put all your money into one thing.
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• Don't buy in haste.

Start as early as possible

In Brazil, where the majority of the population, historically, have never had the opportunity to save, a national strategy for investor education implemented in 2010 is focused almost exclusively on children. "Children usually have the same values, beliefs and social norms as their parents," said Jose Alexandre Cavalcanti Vasco, who heads the education and investor assistance department of the Securities and Exchange Commission of Brazil. If attitudes are to change, he suggests, it will be achieved by educating youth and young adults.

Here in Canada, we may not be facing what Vasco calls the same "intergenerational fatalism" as some developing nations. Nevertheless, starting early is a principle of sound financial planning that applies everywhere. Developing good habits at an early age increases the chances that you'll continue them.