Canadians confident about financial literacy skills; investing remains a gap: Yahoo/Maru poll

A new survey shows many Canadians feel they have a sufficient level of financial literacy despite acknowledging that investing is still one major area they don't understand.

Seventy per cent of respondents to a new Yahoo poll, conducted by Maru Public Opinion, reported feeling confident in their financial literacy skills and have a "thorough understanding" or know "a good deal" about how to properly manage their personal finances.

However, the poll also found less than half of respondents (43 per cent) say they are "very" or "somewhat" financially literate in investments such as stocks and bonds. Only one in 10 say they are "very" financially literate in these areas.

"Unfortunately, escalating interest rates and biting inflation are going to be a crash course in real-time financial literacy for a majority of Canadians," John Wright, executive vice-president of Maru Public Opinion, told Yahoo Finance Canada.

"The findings harbour an encouraging sign that younger Canadians outpace their older counterparts in having some form of more financial education about personal finances."

Tony Salgado, the founder and president of wealth advisory firm AMS Wealth, says he's not surprised many people don't feel confident about stocks and other investments considering the lack of education on these topics in the school system.

Roughly three in 10 respondents say they have taken a supplemental educational course on personal finance.

"Getting financial literacy early in life likely leads to more disposable income, savings, or investments over the longer term—but the conundrum is that if you don't have disposable income, you'll likely never use most of the financial instruments that are available," Wright said.

Meanwhile, Salgado questions whether some Canadians might be overestimating their financial literacy skills.

"I think we need to redefine what it means to be financially literate," Salgado said. "I feel like there could be a false sense of security as to people that believe that they're financially literate."

The survey found 60 per cent of Canadians say they have a monthly budget, with the youngest and oldest cohorts more likely to have one compared to those who are middle-aged.

"I think that's because middle-aged people have the most variable costs," he said.

Younger and older Canadians are more likely to have fixed incomes and expenses, making a monthly budget easier to map out, he explains. Middle-aged individuals are more prone to have unpredictable costs since they might have young children or have to potentially care for elderly parents.

The survey polled 1,524 Canadians between Oct. 26 and 27, and has a margin of error of +/- 2.5 per cent, 19 times out of 20.

With so many pressures on household finances, one reason why some Canadians don't understand investments is because they don't have enough money left over at the end of the month to sock away in a portfolio.

"If there isn't enough money left over then why is this person going to care to learn about investments?" Salgado said.

"So how do you make money leftover? You have to really be careful with your discretionary spending. One of two things has to happen. You need to spend less money or you need to make more money."

Know your investment risk tolerance

It's no secret that the compounding effect of investments can significantly impact a person's financial well-being and help them achieve their life goals. But knowing your risk tolerance is crucial because it will drive every investment decision, Salgado says.

"As an old saying goes, it's not timing the market, it's time in the market," he said.

"The psychology behind it is interesting because when people see things dropping in value, everyone gets scared and sells. The foundational rule of investing is sell when it's high and buy when it's low. But psychology doesn't allow you to do that because you're too scared to lose everything. Why is that? That's because you were not aware of your risk tolerance going into it."

The good news for risk-averse investors is ultra-safe products such as guaranteed investment certificates have seen their returns rise alongside interest rates. A quick scan of rate comparison website Ratehub.ca shows one- and three-year GIC rates are nearly five per cent.

For older Canadians that might not be able to take on significant market risk, Salgado suggests annuity products, which pay a guaranteed regular income.

"Not only is volatility of the market a risk, another risk that people really don't consider is longevity risk," he said.

"Your life expectancy is giving you more years to live which means more expenses, which means you need to have something that's going to guarantee you your payments for the rest of your life. And so I think people need to look into annuities a lot more. I think the rates of return are coming up on annuity products. And people should look at guaranteeing themselves a certain level of income for the rest of their life, which is what an annuity will do."

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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