For Financial Education, It's Up to You

(MoneyWatch)  My good friend Bill Schultheis, the author of The New Coffeehouse Investor, recently blogged about how our education system is failing to teach people solid investment principles. As an example, he discussed how a textbook used in a local community college finance class spent considerable time discussing models for valuing stocks. At the same time, it provided only a brief discussion of how only a low percentage of actively managed funds outperform benchmarks.

"I find it interesting that the authors allocate a couple of chapters to 'security valuation and selection,' and barely one paragraph to the simple concept of index funds," Schultheis wrote.

The two most important things in our lives are our families and our health. Not far behind is money. Of course, it is not money itself that is important, but what money can do -- provide education for our children, a nice home, a good car, vacations, financial security, etc. Yet despite its importance, you may not have received much of a formal education on investing. During a presentation to an accounting firm's employees, I asked them how many had taken even one course on capital markets theory. Only one person had done so.

The failure of our education system has led many individuals to obtain their education on investing from the very people with whom they have a direct conflict of interest -- Wall Street and the financial press. Wall Street needs and wants you to play the game of active investing (stock picking and market timing). They know that your odds of outperforming simple passive investment vehicles are so low that it is not in your interest to play. However, they need you to play so that they (not you) make the most money. They make it by charging high fees for active management that persistently delivers poor performance. The financial media also want and need you to play so that you "tune in." That is how they (not you) make money.

One of my favorite expressions is that education may be expensive, but ignorance can cost you dearly. Fortunately, education doesn't have to be expensive. In Monday's post, I'll discuss some excellent resources that may help you with the education you need to make smart investment decisions.

Further reading: My MoneyWatch colleague Allan Roth has a great post discussing why financial "gurus" like Jim Cramer are good for markets.