Talk – What is the state of financial literacy among the Swiss population?

Financial Literacy Index 2024

Together, we commissioned the market research institute GfK to conduct a representative survey in Switzerland in which over 2'000 people were interviewed. One of the results was that Switzerland is not doing so badly in international comparison. Were you surprised by that?

No, quite the opposite. There are numerous studies on financial literacy, and the topic has gained in importance in recent years. Annamaria Lusardi is a key figure in this area, including at the global level. She is also the editor of the journal «Financial Literacy and Wellbeing», which has shown for years that Switzerland performs well in international comparisons – you could even say it is among the frontrunners. Germany also performs well in this area, which reflects the strong education systems in both countries. This was also confirmed in a global study conducted as part of a background paper for the World Bank. Austria could also be considered one of these countries.

On average, respondents were able to answer 52% of the questions on financial literacy correctly. What surprised you about the results?

Of the ten questions in the study, three are standard questions that are also frequently asked in international studies. They concern the effects of interest, inflation and diversification – fundamental topics. However, we also asked more challenging questions, such as those about the behavior of bonds in the event of a change in interest rates, or about the importance of cash. There were no major outliers in the so-called «big three» questions on interest rates, inflation and diversification. However, we did poorly on questions about cash or understanding the bond market. We may have asked the wrong questions here.

We did see some interesting patterns. One thing that stood out was the difference between men and women in terms of financial knowledge.

Yes, there is well-documented evidence that women are on average less willing to take risks than men, which partly explains the 15 percent difference in correct answers between the genders. Risk aversion tends to be more pronounced in women, which is also reflected in their financial behavior.

We see this pattern not only in accidents, but also in drug and alcohol abuse and in the prison population. Men tend to behave more recklessly overall. Women, on the other hand, openly show their insecurity when they feel unsafe in a situation – which brings us to the topic of self-confidence. When women don't know or understand something, they admit it. Men are different: their «overconfidence bias» is more pronounced. Although they are not always well informed, they still act. That's one point – the greater self-confidence of men, as opposed to the greater risk aversion of women.

Of course, life circumstances also play a role, especially with regard to family planning. Often, the woman takes a step back professionally, works part-time, while the man continues to work full-time. In some cases, women even drop out of the workforce completely to devote themselves to childcare. This distracts attention from financial issues and can lead to lower financial literacy. Moreover, finance has been a male-dominated field in recent decades. Peter Drucker's quote «Culture eats strategy for breakfast» is particularly relevant here: cultural conditioning plays a significant role. Even today, there are couples in which the man has managed the finances alone for 30 years, and in some cases the woman does not even have her own bank account.

One of the questions in our study was about ETFs, and we found that younger people tended to be better able to answer this question than older people.

This is not surprising, as ETFs only became popular in the 1990s thanks to John Bogle, the founder of Vanguard. At that time, I had just graduated from high school, and understanding of broad-based index funds was not yet widespread. Today, it is regularly reported on. The topic of ETFs is becoming increasingly important.

You also mentioned the topic of inheritance, which often only becomes relevant in old age. This also explains why money and finance are often characterized as «old and male».

In my childhood, in my family, which had an entrepreneurial spirit, shares were considered something that was better avoided – almost like a casino. It is unfortunate that such prejudices are still anchored in many people's minds today, because opportunities are being missed as a result.

Particularly with regard to quality of life in old age, it is fatal not to start thinking about investments early on. At 30, this may seem less important, but in retirement, you want to ensure a high quality of life and a certain standard of living – and that can be achieved with the right financial instruments.

A colleague recently told me about his parents, who have been paying money into a savings account for 30 years. The amount accumulated in the account after that time is negligible compared to a global ETF. The ETF has far exceeded the savings account. So, those who do without such investments ultimately forgo a better quality of life in old age.

However, many people fear the fluctuations, or volatility, associated with stock markets. Volatility is often perceived as something negative, when in fact it enables growth. If a company grows steadily by 10% per year over an eight-year period, its value will have doubled over that time span. This is also reflected in an article by Kenneth Fisher in the New York Post from March 2024, which describes how large fluctuations, i.e. those above 10%, occur more frequently in the long term than small movements of -10% to +10%. The fact that stock markets have risen in 73% of years (between 1926 and 2023) is a convincing statistic.

You and I are very interested in financial markets, but we can't expect everyone to share this passion. Nevertheless, it is important that people have some basic knowledge of finance. What would you advise people who have different interests?

My advice would be to take personal responsibility. I once worked on a study for the German Bundestag that looked at the new demands created by the changing world of work. The central finding of this study commission on «Growth, Prosperity, Quality of Life» was: learning personal responsibility.

In this context, I would like to explicitly praise Switzerland, as it performs well in many areas, also in comparison to other countries. It's about taking personal responsibility, and there are numerous educational opportunities today. If you want to find out more, you can find many articles on how to invest properly on the internet. One good piece of advice is to use ETFs – ideally globally diversified funds that invest in different sectors and countries. A clear buy-and-hold strategy is also advisable: you buy the product and hold it for the long term. The key is not to sell at the worst possible times, but to learn to keep your emotions in check.

Kenneth Fisher also repeatedly emphasizes the importance of being politically and media aware. You should know what is happening in the world, but at the same time be able to look away and not be influenced by short-term events. In the first semester of journalism, students learn the principle: «Not ‘dog bites man’, but ‘man bites dog’ is a story.» It is always the horror stories that stand out from the crowd and attract attention. A train running on time is not a story.

What you are talking about is a well-known phenomenon: there are always phases in the media when negative headlines dominate. However, this often has more to do with the media itself than with the actual situation in the markets.

Sentiment fluctuates, and this is reflected in market reports. Sir John Templeton, one of the outstanding market strategists, divided market phases into four stages. The first phase is that of depression, when the media often speak of the «death of equities» or an «equity ice age». Interestingly, this is often an excellent time to buy equities, as valuations are low. Nevertheless, few new funds come into the market during this phase, as many investors have lost money and are depressed, and withdraw.

However, there is always a group of investors who enter the market precisely at such times. This behavior requires courage, because in a market environment in which overvaluations have been corrected, companies are often fairly or undervalued. The second phase that Templeton describes is that of skepticism. Here, many investors hesitate and ask themselves: «Better to keep the powder dry», as they often say in the media. The third phase is optimism. During this phase, we read headlines such as «Yes to ETFs» and many investors return to the market. Finally, the cycle culminates in euphoria, the fourth phase. A striking example is the year 2000 with the telecom company T-Online, which was advertised as the «Volksaktie» (people's share) by the tabloid Bild – shortly before it crashed.

When we talk about the role of the media in the financial sector, it is striking that journalists often look to the past. They analyze market developments retrospectively and describe them as if everything were obvious in hindsight.

Predicting the future, such as whether further losses are imminent or whether it is a good time to enter the market, is impossible. A viable method for long-term success is the dollar cost averaging strategy. This involves regularly investing a fixed amount, regardless of market developments. This allows the invested capital to continue working.

Time is an important factor here, which many underestimate. People often strive to get rich quick – a consequence of our short-sightedness and impatience. ETFs work for you, but they take time. So the key factor is patience.

An interesting study by Nejat Seyhun of the University of Michigan showed that 95% of capital market gains were achieved in just 90 out of a total of 7'500 trading days. Looking at a 30-year period, it becomes clear that impatience and constant buying and selling can lead to missing out on these crucial market developments. Nobody can predict these sharp price increases. There is no crystal ball that tells us when these important sprints in the markets will occur.

For people who don't deal with finance intensively, the message could be: in the end, it's not that complicated. What you should understand is the risk premium. Those who invest receive a long-term premium for the risk they take. Those who don't invest accept long-term financial disadvantages.

Another important principle is patience. Saving and investing requires you to spend less than you could. A well-known example is the so-called «marshmallow experiment» conducted by former Stanford professor Walter Mischel. He sat down with children aged four to five, gave them a marshmallow and said: «You can eat this marshmallow now, or you can wait until I come back. If you don't eat it, you'll get a second one.»

What was interesting was not only whether the children ate the marshmallow, but also the long-term effects. Mischel published his results in 1972 and studied the participants for years. He found that those children who could wait and thus received two marshmallows – about a third of the participants – had significantly fewer problems in later life, for example with drug abuse and obesity. They also had better stress-regulation mechanisms, higher social and cognitive skills and better living conditions overall. This experiment illustrates the importance of patience.

Patience is not only rewarded in the labor market, but also in the capital market. It's about making time work for you, and ETFs offer a simple and effective way to do that. There is no need to find the perfect entry point. Rather, it is about letting time and the compound interest effect work for you. In addition, dividends are an attractive aspect: they represent an additional income stream that adds up over time, especially if you reinvest those dividends.

Michael, thank you very much for the interview and also a big thank you to the audience for their interest.

More on the Financial Literacy Index 2024.