Bridging the gap in financial literacy

Singaporeans should work to improve their knowledge of personal financial management so that they are better equipped to achieve financial security when they retire.

Research worldwide has shown that financial literacy is associated with more financial planning and savings, better investment behaviour, and a better understanding of managing retirement drawdowns.

Conversely, societies with low financial literacy will suffer when their elderly are ill prepared for retirement.

A recent study conducted by Singapore Management University's Professor Benedict Koh and his co-authors Olivia Mitchell and Susann Rohwedder showed that Singaporeans who are financially literate have the confidence to invest in complex securities to earn higher average returns.

The results also revealed that the financially literate accumulate more wealth, are more assured of financial security, and have better diversified portfolios.

"A clear inference from this research is that the more financially literate a society is, the more likely its citizens will secure a better retirement," said Prof Koh, who is Professor of Finance (Education) at SMU's Lee Kong Chian School of Business.

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One surprising finding from his research is that older Singaporeans' levels of financial literacy are comparable overall to those in the United States, even though older Singaporeans score slightly lower on some dimensions, such as knowledge of interest and inflation, and slightly higher on their knowledge of risk diversification.

"Given the maturity of the US financial markets and the access to extensive financial news coverage and analyses in the US, we had expected the elderly in the US to be more financially informed than their counterparts in Singapore," said Prof Koh.

Lacking knowledge of financial instruments

Despite the encouraging results, Singaporeans surveyed in the study were lacking in knowledge when it came to financial markets and risk diversification in investment. Only 47 per cent of the survey respondents answered the question on risk diversification correctly, with many selecting the "Do not know" option.

According to Prof Koh, this reflected a lack of knowledge among Singaporeans of how to utilise investment instruments traded in markets to grow retirement savings.

"It is therefore not surprising that most elderly Singaporeans prefer to invest their savings in simple financial products and avoid complex investment vehicles. Elderly Singaporeans tend to invest their retirement savings in property, savings or fixed deposits, bonds and whole life insurance products and avoid complex investment instruments such as shares, unit trusts, investment-linked insurance policies, investment properties and gold," he said.

Singaporeans are also lagging when it comes to the diversification of their investment portfolios.

Very few of them were found to adopt asset allocation, and many also do not reduce the risk exposure in their portfolio holdings as they age.

Gender gap in financial literacy

Prof Koh's research also showed that women are less informed than men about stock diversification, although this gender gap in financial literacy is not unique to Singapore.

Existing studies have shown that this phenomenon exists worldwide.

"For the pioneer generation, many women did not work or have opportunities to pursue higher education. Hence, their lack of education may limit their exposure to financial markets and investment vehicles such as stocks and unit trusts," explained Prof Koh.

More financial education required

Prof Koh also noted that those with a high level of education may not necessarily be more knowledgeable about personal financial management. As such, he urged for more financial literacy programmes to be introduced in Singapore's education system.

"Financial literacy should be regarded as a life skill that everyone should possess. Some countries have introduced mandatory financial literacy programmes in schools, colleges and tertiary institutions. If Singapore is serious about improving the financial literacy of its citizens, the authorities and regulators should consider how to formally introduce such life skills into the school or university curriculum," he said.

As Singaporeans generally lack specific knowledge regarding asset allocation, complex investment vehicles and risk diversification in a portfolio context, financial services providers should also educate their customers prior to persuading them to purchase financial products.

Said Prof Koh: "Although the MoneySense financial education platform initiated by the Monetary Authority of Singapore provides useful information and content to enhance financial literacy of Singaporeans, more efforts can be made to reach the audience at the grassroots level."

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