Student

Our Approach to Investing

February 26, 2021

Image for Our Approach to Investing

GameStop. Stonks. Short squeezes. Over the past month there has been extensive discussion about what we should be teaching students regarding investing. Lots of opinions have been put forth, often based on an individual’s personal experience investing in the stock market, but we wanted to take time to share how investing is addressed in finEDge, a research-based, single-semester, high school financial education program, which includes a module on investing.

Questions we considered

finEDge’s approach to investing is based upon extensive research on investing and financial education. The creation of a high-quality curriculum requires translating research findings into practical solutions. We approached our literature review with the following questions in mind:

  • 1) What does “investing capably” mean for the average person?
  • 2) What does the average person need to know and do in order to invest capably?
  • 3) Where does the average person tend to go wrong with investing?

Informed by research

Our review of the research suggests that in a high school financial education course, instruction about investing should emphasize passive investing strategies over active strategies. By passive investing strategies, we mean investing in low-cost, highly diversified funds, such as index-based mutual funds. Below is a summary of the research that informed our approach:

  • —The returns of passive investments often outperform more actively managed portfolios. Barber and Odean found that traders who traded heavily and pursued an active investment strategy earned an annual return of 11.4%, underperforming the market, which earned 17.9%. Even more actively managed mutual funds tend to produce lower returns than the market.
  • — Many investors do poorly at selecting stocks. Picking “winners” is challenging for any investor. Some investors use historic returns to select stocks, erroneously believing the past is indicative of future returns. Likewise, investors also often prefer local and well-known stocks, and avoid foreign stocks.
  • —Passive investing can help blunt the impact of behavioral biases. These biases, which many investors exhibit, lead to lower returns. They include overconfidence, a propensity to sell winning stocks and keep losing stocks, and a tendency to repeat investments they associate with personal success and avoid those they associate with pain.
  • —Retirement is a primary reason people invest. Strategies to develop and preserve retirement savings often differ from strategies to increase current income. Passive investments can offer greater tax efficiency, diversification, and lower costs for investors with the primary motivation of saving for retirement.

In the classroom

According to our extensive field-testing, students find learning about passive investing engaging —a finding in sharp contrast to the commonly held belief that teaching students to “play the market” is the only way to capture their interest. As one teacher noted, the majority of students connected with the idea of passive investing, while only a few seemed intrigued by an active approach. With the rapid shift to defined-contribution retirement plans, it is critical that all students have the knowledge and confidence to invest capably. The finEDge approach prepares students to do exactly that.

A financial education program’s goal should not be to encourage a quick-pick, adrenaline rush approach to investing. The goal should be to foster long-term productive financial behaviors and attitudes that lead to financial well-being. It’s time financial education programs start using this approach to better prepare their students for the investing activities in which they will most likely participate throughout their lives.