Establish financial literacy as part of University Requirements
Welcome to the Class of 2022. Something our new students will notice over their four years at Brandeis is that there are plenty of course requirements here: School of Science, Non-Western and Comparative Studies, Foreign Language, the list goes on. Evidently, these are topic areas that the University deems worthy of study by every student who passes through our halls. The Brandeis website lists their respective justifications―to examine the non-Western world, to understand the language of others, etc. What it doesn’t mention is a basic course in financial literacy.
Of course, the Business program offers courses in financial accounting, managerial accounting and other related subjects. But for Business and non-Business majors alike, there is no single course about how to manage one’s personal finances.
Why is this a problem? Because after graduation, we’re going to suddenly start filing our own taxes, saving for retirement and making educated decisions about our financial trajectories. We’ll have to know whether to invest in stocks or bonds, mutual funds or real estate and, most importantly, understand what each of these terms means.
But let’s dial it back. For the last year, I’ve had about $3,000 sitting in a savings account that I contribute to on a weekly basis. “A penny saved is a penny earned,” my dad would always say, so I listened—even if it meant one fewer muffin at Einstein’s. Now, how much have those funds accrued in interest over the past several years? According to , the answer is about .06 percent per year on average for savings accounts, or about 60 cents for each $1,000. So I’ve made about $1.80. But that’s without taking inflation into account, which usually averages about 2 percent per year, which means that my $3,000 one year ago is now worth $2,940. In other words, at the end of the year, I’m down about $55. And I thought by saving I was making money?
So I spoke further with my dad, who told me about mutual funds, and then about a specific kind of mutual fund called an index fund. He said that these funds allow one to invest in stocks without bearing high amounts of risk. In other words, mutual funds are diversified stock portfolios. They allow one to buy a tiny part of many different companies in order to take part in their shared price appreciation while minimizing the risk if any singular company is to fail.
Many mutual funds track certain sectors, like information technology firms such as Google, Amazon, Facebook or consumer discretionary companies — Macy’s, Lord & Taylor, etc. Index funds track certain indexes, like the Dow Jones industrial average or the S&P 500.
But prior to 1976, index funds didn’t exist, as an describes. If someone wanted to invest in stocks, they would have had to either buy individual stocks or shares of a normal mutual fund which, while diversified, would be actively managed by professionals who generally charged high fees.
John Bogle, then 46 years old, had been fired from a position as CEO of Wellington Management when he decided to revolutionize the way people invest. In 1975 he founded The Vanguard Group, an investment management company, and one year later he started the world’s first index fund. Steven Dubner, host of public radio show “Freakonomics Radio,” explains: “The notion was brutally simple: Most stock pickers think they are better than the market — and they aren’t; therefore, investors should just buy the whole market. And, since you’re not paying the big salaries, and all the other costs that go along with those stock pickers — the fund would be much cheaper to buy.” How much cheaper? According to , the average expense ratio of an actively managed fund is .84 percent, verses .11 percent for an index fund. Over time, these small numbers make a big difference.
As you can imagine, initially Bogle faced lots of pushback. The egos of Wall Street traders weren't ready to relinquish what they viewed as their indispensable role in the financial services industry. But slowly, the middle class caught on. In fact, according to , since the 2008 financial crisis, trillions of dollars have been funneled out of actively managed funds and into index ones, which are referred to as passive since they merely track market indexes and are traded very rarely, if at all.
How do index funds perform relative to actively managed mutual funds? According to only 15.3 percent of actively managed mutual funds beat their firm’s own index on a given year. And after consulting costs, only two to three percent of funds come out on top of the index, according to a published in The Journal of Finance. Beating the index consistently is even more difficult.
Even legendary investor Warren Buffett is a huge fan of index funds. In fact, in 2007 that over the next decade, the S&P 500 would outperform a hand-picked selection of hedge-fund stocks. In 2017, it was finally revealed: The index had gained an average of 7.1 percent growth each year, compared to his opponent’s mere 2.2 percent growth. Mr. Buffett gave the money to charity.
What does this mean for us as students? Save early, save often and put whatever you don’t need for the short term in an index fund. Even if you just save the price of a coffee or lunch each week, the gains compounded over time could be startling. Consider : If we assume a four percent annual return after inflation, one dollar saved at age 20 would grow to $5.84 when you turn 65. One dollar saved at age 30 turns into $3.95, at 40 to $2.67, and so on. The longer we wait to invest, the dimmer the return yield will be.
In other words, time is our biggest asset. Starting a brokerage account to begin investing in index funds is easy. Vanguard and Charles Schwab both offer user-friendly platforms, for instance. The best part? Investing in index funds doesn’t require so much skill or knowledge, just the wherewithal to put it there.
And Brandeis: start a basic course in financial literacy. That way our children can be as lucky as us to attend this fine institution.