Tuesday, August 20, 2013

The need for financial education

One of the driving topics in this blog is about encouraging self financial education, to learn, if not how to manage our savings like Buffet, at least, not to be cheated by financial industry (banks, insurance companies, funds, governments..,), at least not most of the times. You cannot avoid it always since they work 24h per day on that with most skilled people in the field.., but at least let's try.

So, last weeks in Moneybox, a program of BBC Radio 4 they talked about something very related to this, if not the same thing, how we pay for the City, that is, how we all pay when we try to save, either by investing in a managed fund, our pension fund or .....    and if this is really worth the money.

There were 3 programs, first related to investing funds, hedge funds, etc.., second about pension funds and third about derivatives and high frequency trading.

I would like to encourage to anyone interested in his/her own money and in learning how really this financial industry work, to listen carefully to this 3 mp3 audios, it will teach you more about this than many other sources.

Just to comment a little about them, first program pointed out that when you send you money to be invested in one of these great hedge funds, it goes from your pocket (or bank account), to the real bought share, commodity, etc.., through 15 o 16 middlemen!!!!, that is, a full soccer team, including some reserves.


One of the best sentences in this audio is that the way to earn really money with an hedge fund is by owning/managing one, because of the fees.. Most of them are managed with the mediocrity principle and cannot beat most passive funds that just follow major indexes (SP500, NASDAQ, etc..).

The second audio is related to pension funds, basically how low return they provide, and how difficult is to get information about your own pension fund, portfolio, fees, real return, and the high fees that reduce the total return.

One funny thing is that fund managers often get a fee on the total amount of managed money, and normally a pension fund gets more and more money in every year.., so they get more commissions on that money, no matter the profit ...


The film is actually about an internet startup, but maybe not that different

So, grosso modo, if an average person puts money in his pension fund during 25 years, if the fund takes 1% fee on the capital, it has taken 25% of that person's money in the fund in these 25 years???

Last audio is about derivatives and high frequency trading.

The derivatives part was about SWAP positions sold to people with mortgages. They were sold to people like an insurance against rises of interest rates but, instead, they really are a bet that bets that interest rates will go up, and, if that happens, you earn a lot of money, the different you would pay more in your mortgage.

But, unlike an insurance, these SWAPs have a big drawback, if interest rates go down, the SWAP owner, the person with a mortgage PAYS that money!!! It is really a futures' contract on interest rates...

And, of course, these SWAPs were sold when interest rates were at peak, and they have only go down since then...

Rest of audio is about blaming on derivatives.., and I don't totally agree on, but I recognize the big danger of inadequate leverage ratio, and about High Frequency Trading, funny to know, but not normally related to one's personal money.

In conclusion, highly recommendable podcasts, specially first and second, to convince yourself that you need financial education or, at least, to be really carefully with your money.


References:

Moneybox BBC

Direct url to the podcasts:

http://downloads.bbc.co.uk/podcasts/radio4/moneybox/moneybox_20130803-1230b.mp3
http://downloads.bbc.co.uk/podcasts/radio4/moneybox/moneybox_20130810-1230a.mp3