Public Education Ignores Data so Why Shouldn’t Investors?

It is amazing that investors continue to make poor decisions regarding their personal finances. They ignore proven data and needlessly waste their hard earned money by paying too much in fees, not diversifying and misunderstanding their time frame.  If you look at the problem closely, their decisions become less surprising. Most investors have spent about 13 years of their lives in a large organization that disregards scientific fact when making decisions regarding educating our nations youth.  A closer look at the data reveals that investors are following the model of our current system of public education. The results of both need massive improvement. A great many investors ignore the fact that fees are the  largest determinant of investor returns, as Morningstar notes.   They also don’t diversify properly, own too much of their companies’ stocks, and often use short-term funds for long-term goals. They ignore the data that the only “free lunch” for investors is diversification. In disregarding fees and basic principles of diversification, investors’ results are not pretty. According to DALBAR, the majority of investors earned about half the return of the markets during the past two decades. This so called “Behavior Gap” could have been easily avoided. Investors could have greatly increased their returns by looking at data comparing the performance of low-cost index funds placed in globally diversified portfolios versus those of expensive funds that try to “time” the market. The  easily attainable evidence is overwhelmingly in favor of the former strategy. Why do many investors continue to tune out such widely available data and continue to make poor choices regarding their finances?  Conflicted financial sales people who are trained in the art of persuasion certainly play a role. Our own cognitive defects that encourage us to chase the latest fad and sell in panic during stressful times also contribute to the poor performance of most individual investors. While these two factors are important, we also have to look at our educational system. I am not speaking about the dreadful,  lack of basic  financial  principles being incorporated into the daily curriculum. While this is a major error, there is something that is structurally far worse that needs to be examined. Most public schools ignore data regarding superior education methods that is readily available. Many school systems choose to continue to use archaic procedures that have long worn out their welcome in the modern age. Why should we expect investors to use data in their investing decisions when those in charge of training young minds in their formative years often chose to ignore it?? My own personal experience of being both a public school teacher CFP and President of a fee-only RIA firm has given me a unique perspective on how our educational  system  creates  woefully unprepared future investors. Much like investing, process is paramount to developing young minds. Here are five ways our system of public education takes a heretical view towards data and contributes to creating minds not prepared to face the challenges of managing money and in many cases, life in general: 1. Ridiculous early start times –  Where I live, high school students have to be in class at about 7AM. There are a number of problems with this. Science has proven adolescents are programmed to fall asleep later due to biological factors.   Teenagers need about 8-9 hours of sleep. Homework, sports, work and other obligations keep many students up until midnight or later. If students have to wake up at 6AM, they will be woefully sleep deprived with the accompanying long-term adverse effects. Often, in order to get a little more time to sleep,  they skip breakfast which creates a nutritional disaster and has been proven to contribute to obesity. Finally, lack of sleep is a major contributor to depression and increases the chances of getting involved in an auto accident.  These problems could be avoided by looking at data and adjusting  school starting times. This would entail logistical creativity but that would pale compared to the price of leaving the current system in place 2. Not learning a foreign language at an early age –  Most schools don’t begin teaching foreign language until middle school. This ignores the data that clearly states learning a foreign language as early as possible is a more effective method. Young children have minds like sponges and are less inhibited. Early learning of a foreign language will also increase their sensitivity to other cultures. Why many students are in school for 7 years without having this benefit is quite baffling. 3. Archaic  classroom rules – Many schools ignore data and insist children must remain still and quiet in order to learn. The still dominant model of “sit and git” does much more harm than good. Science has proven movement can strengthen learning, improve memory retrieval and enhance motivation. How many fidgety children have been classified as behavior problems?  The  wasted potential  of millions of students is the price of ignoring science. 4 . Summers off – It is amazing that schools still follow a farmer’s calendar when less than 1% of the population works in this profession. While having summers off made sense in 1900, it has no place in the twentieth century  (despite what the lobbyists for summer camps say). Many studies have proven that one month off equates to one month of  lost education from the previous school year. This also effects disadvantaged youths more acutely. They often lack stimulus and proper nutrition in the summer and this atrophies their future learning to a further extent.  This outdated policy also contributes to wealth inequality in our nation. 5. Inaccurate student evaluations. While there are many learning styles, standardized tests cater to the visual learner. This type of learner processes information by seeing and making pictures in their minds. Many students learn by listening or movement. These students often underperform on standardized exams giving a misleading picture of their vast potential. Teaching the way students learn should replace the old methodology based on the idea of mass production. This was designed to be cheap, quick and prepare young people to work on an assembly line. It is very clear that our current educational system does not foster the skills of successful investing. Thinking outside the box, following a scientifically backed process, and not being afraid of making mistakes are all attributes lacking in our current  educational configuration. While we have many great teachers, they are handcuffed in our current state due to many outside conflicting forces. In many ways it is very similar to the financial services industry. the truth could put many people out of work and great efforts are mounted to stop it from spreading. In the end it is no surprise our nation faces a potential crisis for both the young and old regarding student loan debt and underfunded 401K plans. The question is: Will we continue to ignore data in personal finance and education and reward a minority of our population that have vested interests in the status quo?  Or should we embrace data which will benefit the common good?   The answer to this question will most likely shape the future direction of our nation. In the words of Mark Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

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