11 August 2023

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How to invest: 5 mistakes and 5 tips

Luigi Campopiano

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If you have $100 in your checking account, and it offers an annual interest rate of 2%, will the accumulated savings be equal to, greater than, or less than $102 after five years? 

If the interest rate of a bond increases, does its price increase or decrease? 

These are some of the questions that the Italian Securities and Exchange Commission (Consob) has posed to Italians in recent years to determine their level of financial literacy. It's important to realize that correctly answering questions of this difficulty level is far from easy for most people. 

It's worth discussing this further. Every year, statistics on the financial literacy of Italians make headlines in the newspapers. And in the U.S., a 2021 report from the Milken Institute concluded that the financial literacy outlook was “grim.” The report’s authors conducted a landscape analysis that revealed little progress over the past decade and persistent gaps along racial, socioeconomic and gender lines.

Drawing from the Consob report, here are some “lessons learned” and pointers. 

5 things to avoid

• Insufficient and poor diversification. Focusing on only a few sectors, countries and investment types can increase risks.
• Procrastination. Investment requires decisions; delaying them due to fear of making mistakes is counterproductive.
• Acting on impulse. Market news is constant and wide-ranging. While reading and increasing knowledge is useful, decisions shouldn't solely rely on individual events.
• Copying trends, friends or relatives. What works for others might not necessarily be suitable for our situation.
• Delegating everything. Disregarding how we're investing just because an expert or more knowledgeable relative handles everything is counterproductive and potentially risky.

5 tips for success

• Define the objective. Understanding the purpose of the investment is crucial to determine how much risk is needed to grow the wealth consistently.
• Calculate the time horizon. Apart from the objective, the available time contributes to determining the ideal portfolio balance.
• Keep costs in check. Controlling investment expenses, as shown by numerous research studies, can make a significant difference.
• Practice discipline. Unless objectives change, alterations to the strategy are generally contained.
• Choose an ally. Recognizing one's limitations and seeking qualified support can be highly beneficial.

According to data collected by Consob's report "Attitude towards Financial Planning of Italian Families,” only a minority of Italians can correctly answer questions like those mentioned at the beginning. More importantly, there hasn't been a significant improvement in skills over the years, according to various surveys conducted by the Supervisory Authority. The improvement has been noted as "slight." Therefore, the level of financial literacy remains "fairly low." 

Another authoritative source on financial education is the periodic analysis conducted by the OECD and the International Network on Financial Education. The latest research ranked Italy towards the bottom, ahead of only Malta.

The research carried out by Consob reveals that trust in financial advisors remains unchanged at a modest 10%. Combining the evidence seen so far, Italians are relatively inexperienced investors and are not very open to seeking advice from professionals. 

Lastly, there is a positive association between the attitude towards financial planning and the level of financial knowledge: as financial literacy increases, so does the propensity to invest.