Last week, Federal Reserve Chairman Alan Greenspan indirectly gave your friend the Fool an endorsement. To be precise, when speaking to the Congressional Black Caucus, he strongly advocated more financial education for Americans.
According to an AP story, he noted that, "Improved education of Americans in the area of financial literacy is critical if the country is going to combat financial fraud" and explained that, "the financial marketplace has grown increasingly complex since the era four decades ago when all Americans needed to know was how to write a check and open a savings account." (His words here are paraphrased.)
This makes a lot of sense. How can Americans ever hope to invest successfully for their futures if they don't understand basic things, such as what kinds of returns to expect from the stock market and other alternatives, how to dig out of credit card debt, how not to get taken when buying a car or home, how to evaluate companies in which to possibly invest, and how significant things like stock splits really are or aren't.
Here, see if there are any holes in your financial know-how:
- Is a "reverse mortgage" a valid income-producing option for most people?
- Does an S&P 500 index fund spread your money out evenly over 500 companies?
- Can you expect the stock market to return an average of about 10% or 11% per year over the coming decades?
- Do dividends play a major role in stock returns?
- Stock buybacks are almost always a good thing, right?
- Nope. A reverse mortgage allows you to convert the equity in your home into a lump-sum payment, monthly income, or a line of credit. It can make sense for some senior citizens, and is not even available to those under 62, but understand that heirs will no longer be inheriting the home.
- Nope. Here are the top 10 holdings of Vanguard's S&P 500 Index Fund: General Electric
(NYSE:GE), Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT), ExxonMobil (NYSE:XOM), Pfizer (NYSE:PFE), Citigroup (NYSE:C), Intel (NASDAQ:INTC), American International Group (NYSE:AIG), Johnson & Johnson (NYSE:JNJ), and IBM (NYSE:IBM).
These 10 companies make up roughly a quarter of the value of the S&P 500. The other 490 companies get to split the remaining three quarters (and you can imagine how little value the last 100 companies contribute).
- Nope. It's true that over most of the last century, the stock market did appreciate by an annual average of 10% to 11%. But that's the past -- it's over with, and quantifiable. The future remains unrevealed. The next 10 years might average 7% or 15%. The next 15 or 25 years might average 6% or 12%. It helps to know what has happened in the past, so that you don't expect 30% annual returns. Just remember that every span of X years is likely to differ at least a bit from another span of X years.
- They sure do. Here's my colleague Jeff Fischer, on dividends: "Over the last 75 years, dividends accounted for a whale-sized 40% of the S&P 500's total return."
- Not necessarily. The benefit of companies buying back (and essentially retiring) some of their stock is that the remaining shares become more valuable. (Imagine a pizza that's cut into six pieces instead of eight.) The possible drawback is that a company might be buying back shares when they're overvalued. If so, then company money (read: your money, that of shareholders who own the company) is being ineffectively spent. It might be better spent just paid to you directly as a dividend, or spent in some other way to grow the company.
Another danger in buybacks is that since they boost the value of remaining shares, they might possibly be used to keep increasing earnings per share (EPS). Rising EPS is good for investors, but not so much if it's not somehow tied to growth in operating earnings.
How the Fool can help
So now that you agree (I hope) with Alan Greenspan that financial education is critical, where does the Fool come in? Well, we're all about financial education -- and have been for 10 years now. The motto many folks know us by starts off with learning: "to educate, amuse and enrich."
Do yourself and your financial security a favor. Take advantage of some of our many educational offerings. Many are free, some cost a modest amount (after all, we need to keep the lights on here at Fool Intergalactic HQ). (We even offer money-back satisfaction guarantees on most of our stuff.) Here are just a few of what we have:
How-to Guides and Online Seminars, on all kinds of topics.
- The Fool's Credit Center, featuring guidance on managing your credit record and getting out of debt (plus, our designed-just-for-Fools credit card).
- The Fool's Home Center, full of home-buying and mortgage tips.
- The Fool's Savings Center, loaded with tips on where to park your savings, including some special rates for Fools.
Fool Stock Newsletters, offering investment ideas and stock evaluation insights.
- The Fool's Broker Center, featuring guidance on how to choose the best brokerage for yourself.
- Our TMF Money Advisor personal financial planning service, featuring objective, personalized advice for you and your specific situation.
- The Fool Community, our vast and vibrant discussion board community, where you can interact with (or just lurk and learn from) thousands of fellow Fools who are discussing everything under the sun.
And finally, if you're now so fired up about financial learning that you'd like your family members to share in the enlightenment, check out our book for young people, The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of -- by David and Tom Gardner, with moi.
Happy learning, Fool!
Thanks to all her learning, Selena Maranjian is smarter than a speeding bullet (and faster than a tall building). For more about her, view her bio and her profile. You might also be interested in books she has written or co-written such as The Motley Fool Money Guide. The Motley Fool is Fools writing for Fools.