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I tweeted about this earlier but thought it was worth a broader discussion as I thought about how best to teach students about investing. This statistic from a Morningstar article caught my attention:
John Rekenthaler stated in a post that indices are dominating fund sales. Some 68%—or $284 billion—of net US mutual fund sales for the 2014 fiscal year were exchange-traded funds and passive while only 32% were active funds.
“The post-2008 pursuit of index funds was no mere infatuation,” Rekenthaler wrote. “Passive investing is now the mainstream approach.”
Diving deeper there has been a plethora of recent articles about active management’s underperformance:
Full disclosure: My personal bias as someone with 25 years of investing experience (has it really been that long since I set up that Quick & Reilly brokerage account?) including a stint in the mutual fund complex as a research analysis can be summarized simply: Use passive investing for core stock market holdings (U.S., international and emerging markets). Why? 1) Fees: 1% vs. 0.05% (average fee on active mutual fund vs. popular US index fund) 2) It is really, really, really hard for an active manager to beat the markets. Depending on time period and research methodology, you can find figures as low as 0.6% (yes, that is 6/10 of 1%), or 24% or 39%. Hint: the longer the time frame analyzed, the lower the percentage who outperform. Why? See #1 and the drag that fees have on performance.
OK, knowing this, what do we do about teaching students about the stock market? The most popular method seems to be the “Stock Market Game,” in which students create fictional portfolios over a short time frame and compete against each other to see who has the largest portfolio value at the end. So, what are the benefits:
As an entry point to teach students about investing, most teachers see the benefits described above and love the contest.
Spoiler alert: While interviewing for investment management positions almost 20 years ago, I had to recommend a stock and the rationale behind my recommendation. To make this real-world, I took a few hundred dollars, bought some shares of Motorola in hopes that a robust new product pipeline would drive the stock higher and I would achieve a two-fer: a job offer and a few hundred dollars in gains. After a 30% jump in price, I took my gains and gleefully looked forward to my interviews. As I breathlessly described by brilliant investment analysis (my Master of the Universe intuition) and how that led to extraordinary gains in Motorola, the investment manager stopped me in my tracks with these words “You got lucky.”
Is the winner in a short-term stock market game lucky? Hint: Don’t ask the winner to answer this question. Yikes, just came across this headline: Third graders outsmart high school students to win Stock Market Game. Want to create overconfidence? Leave out the element of luck and tell students they won based on “skills” or “smarts.”
So, what should a next generation stock market game simulation look like:
Please share with me any additional ideas on how we can best teach investing. Who knows, maybe I will work with a game designer in the mean time and build my “ideal” stock market game. Stay tuned..
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Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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