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How Financially Literate Are You With Investing?

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How Financially Literate Are You Compared to the Average American?

Are You Financially Literate?

If you’ve ever paid attention to any report on financial literacy from around the world, you’ll likely know that the results aren’t exactly awe-inspiring.

For example, according to one global survey, only about 33% of adults are financially literate.

Americans tend to fare better on average, but not as much as you might imagine. In fact, as we showed in our infographic on the Financial Literacy Problem, one ongoing survey actually sees average U.S. performance slowly dropping over time.

It raises the question: what do people actually know about money, investing, and wealth?

Investment Literacy

A recent poll by Lexington Law aimed to get a sense of U.S. financial literacy, with a focus on basic investment knowledge on stocks, bonds, and building a safe portfolio.

Specifically, it asked 4,000 Americans four different multiple choice questions:

  1. What is the safest investment type?
  2. What happens to bond prices when interest rates rise?
  3. What is a bull market?
  4. What happens to your stock if a company goes bankrupt?

If you think you know the answers to even two of these questions, you are off to a good start!

The survey ultimately found that the average score on this test was 48.8% – meaning that Americans get slightly fewer than two questions correct on average.

Cheat Sheet

Question #1: Safest Investment
Based on the options provided on the multiple choice, the correct answer was Treasury Bonds. Roughly 53% of Americans would get this right, if asked.

Question #2: Bond Prices
Only 25% of respondents said that bond prices would decrease if interest rates rise, which is the correct answer. To be fair, this relationship is somewhat counterintuitive.

Question #3: Bull Market
With the current bull market becoming the longest in history this month, this terminology has been all over the news. That said, just 53% of respondents understood a bull market to be a period in which stock prices are expected to rise.

Question #4: Bankruptcy
If you own a stock and the company goes bankrupt, what happens? Interestingly, people fared best on this question, with 64% realizing that the stock becomes “virtually worthless”. It’s worth noting, however, that a 64% success rate is still the grading equivalent of a “D”.

How did you do on this test – are you financially literate about investments? Where did you go wrong?

If you need to brush up on investing knowledge, don’t forget to visit our Wealth 101 project that features easy-to-use infographics about personal finance topics.

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Money

Mapping Global Income Support During COVID-19

The need for income support during COVID-19 has been vast. This map visualizes different levels of income support around the world.

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income support during COVID-19

Mapping Global Income Support During COVID-19

Income loss has impacted many during the COVID-19 pandemic. Unemployment, reduced hours, office closures, and business shutdowns have prompted the need for mass income support.

Globally, income from work fell $3.5 trillion in the first nine months of 2020, a change of -10.7% compared to the same period in 2019.

In the above map, Our World in Data reveals the different levels of income support provided by governments across the globe.

Income support, in this case, is defined as governments broadly covering lost salaries, or providing universal basic income or direct payments to people who have lost their jobs or cannot work. Levels of income support are changing over time.

Small Government

Many world governments have provided no support when it comes to a universally applicable scheme to cover lost income in their countries.

Examples: (as of January 25th, 2021)

  • 🇻🇪 Venezuela
  • 🇸🇾 Syria
  • 🇧🇾 Belarus
  • 🇧🇩 Bangladesh
  • 🇰🇭 Cambodia

The majority of the governments providing no support are in low to lower-middle income countries. Based on a recent report from the International Labour Organization (ILO), lower-middle income countries have also seen the highest income losses, reaching 15.1% since 2019.

Developing countries tend to experience a significant fiscal stimulus gap, in which they do not have the capacity to cushion lost income or lost jobs. In fact, it’s estimated by the ILO that low and lower-middle income countries would need to inject an additional $982 billion into their economies to reach the same level of fiscal stimulus as high income countries.

A Helping Hand

There are other governments that are giving out some help on a wide-scale basis, providing citizens less than 50% of their lost salaries:

Examples: (as of January 25th, 2021)

  • 🇿🇦 South Africa
  • 🇨🇳 China
  • 🇷🇺 Russia
  • 🇹🇭 Thailand
  • 🇦🇺 Australia

South Africa’s unemployment rate was the highest in the world at 37.0% in 2020, an increase from 28.7% in 2019. Despite having one of the strictest lockdowns, the country has not been able to slow rising case counts or job losses. Now, South Africa is facing another threat, as a new strain of the novel coronavirus has taken hold in the nation.

The Most Supportive Governments

Finally, many world governments have offered higher amounts of income support, providing citizens with more than 50% of lost income:

Examples: (as of January 25th, 2021)

  • 🇨🇦 Canada
  • 🇺🇸 United States
  • 🇬🇧 United Kingdom
  • 🇪🇸 Spain
  • 🇸🇦 Saudi Arabia

Regionally, it’s the Americas that have been hit the hardest, according to the ILO. The region experienced a 12.1% drop in labor income in 2020 compared to 2019, revealing the need for broad-based income support.

U.S. unemployment went from 3.7% to 8.9% between 2019 and 2020. While the American government initially provided support in the form of the CARES Act, the policy response was recently extended through the more recent $900 billion relief deal.

Income Support Post COVID-19

While some countries have not been in extreme need of income support, others have been and haven’t received it. When looking at demographics, the hardest hit workers have been temporary workers, migrant workers, care workers, and self-employed vendors who have no labor contracts or employment insurance.

As a result, some critics have used this as an opportunity to call for universal basic income (UBI). A three-year study is already being implemented in Germany, for example, to test out how effective this kind of income support would be in the post-pandemic period.

Today, however, income is not a guarantee, and while in 2021 things may be returning to ‘normal,’ that does not mean that income levels will go back to normal.

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Visualized: A Global Risk Assessment of 2021 And Beyond

Which risks are top of mind in 2021? We visualize the World Economic Forum’s risk assessment for top global risks by impact and livelihood.

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Visualized: A Global Risk Assessment of 2021 And Beyond

Risk is all around us. After the events of 2020, it’s not surprising that the level and variety of risks we face have become more pronounced than ever.

Every year, the World Economic Forum analyzes the top risks in the world in its Global Risks Report. Risks were identified based on 800+ responses of surveyed leaders across various levels of expertise, organizations, and regional distribution.

Which risks are top of mind in 2021?

The World’s Top Risks by Likelihood and Impact

According to WEF’s risk assessment methodology, all the global risks in 2021 fall into the following broad categories:

  • 🔵 Economic
  • 🟢 Environmental
  • 🟠 Geopolitical
  • 🔴 Societal
  • 🟣 Technological

It goes without saying that infectious diseases have now become one of the top societal risks on both metrics of likelihood and impact.

That said, environmental risks continue to dominate the leaderboard, accounting for five of the top 10 risks by impact, especially when it comes to climate action failure.

Several countries are off-track in meeting emissions goals set by the Paris Climate Agreement in 2015, while the pandemic has also delayed progress in the shift towards a carbon-neutral economy. Meanwhile, biodiversity loss is occurring at unprecedented rates.

RankTop Risks by LikelihoodTop Risks by Impact
#1🟢Extreme weather🔴Infectious diseases
#2🟢Climate action failure🟢Climate action failure
#3🟢Human environmental damage🟠Weapons of mass destruction
#4🔴Infectious diseases🟢Biodiversity loss
#5🟢Biodiversity loss🟢Natural resource crises
#6🟣Digital power concentration🟢Human environmental damage
#7🟣Digital inequality🔴Livelihood crises
#8🟠Interstate relations fracture🟢Extreme weather
#9🟣Cybersecurity failure🔵Debt crises
#10🔴Livelihood crises🟣IT Infrastructure breakdown

As for other risks, the prospect of weapons of mass destruction ranks in third place for potential impact. In the global arms race, a single misstep would trigger severe consequences on civil and political stability.

New Risks in 2021

While many of the risks included in the Global Risks Report 2021 are familiar to those who have read the editions of years past, there are a flurry of new entries to the list this year.

Here are some of the most interesting ones in the risk assessment, sorted by category:

Societal Risks

COVID-19 has resulted in a myriad of knock-on societal risks, from youth disillusionment and mental health deterioration to livelihood crises. The first two risks in particular go hand-in-hand, as “pandemials” (youth aged 15-24) are staring down a turbulent future. This generation is more likely to report high distress from disrupted educational and economic prospects.

At the same time, as countries prepare for widespread immunization against COVID-19, another related societal risk is the backlash against science. The WEF identifies vaccines and immunization as subjects susceptible to disinformation and denial of scientific evidence.

Economic Risks

As monetary stimulus was kicked into high gear to prop up markets and support many closed businesses and quarantined families, the economic outlook seems more fragile than ever. Debt-to-GDP ratios continue to rise across advanced economies—if GDP growth stagnates for too long, a potential debt crisis could see many businesses and major nations default on their debt.

With greater stress accumulating on a range of major industries such as travel and hospitality, the economy risks a build-up of “zombie” firms that drag down overall productivity. Despite this, market valuations and asset prices continue to rise, with equity markets rewarding investors betting on a swift recovery so far.

Technological Risks

Last but not least, COVID-19 has raised the alert on various technological risks. Despite the accelerated shift towards remote work and digitalization of entire industries, the reality is that digital inequality leaves those with lower digital literacy behind—worsening existing inequalities.

Big Tech is also bloating even further, growing its digital power concentration. The market share some companies hold in their respective sectors, such as Amazon in online retail, threatens to erode the agency of other players.

Assessing the Top 10 Risks On the Horizon

Back in mid-2020, the WEF attempted to quantify the biggest risks over an 18-month period, with a prolonged economic recession emerging on top.

In this report’s risk assessment, global risks are further classified by how soon their resulting threats are expected to occur. Weapons of mass destruction remain the top risk, though on a much longer scale of up to 10 years in the future.

RankRisk%Time Horizon
#1🟠Weapons of mass destruction62.7Long-term (5-10 years)
#2🔴Infectious diseases58Short-term risks (0-2 years)
#3🔴Livelihood crises55.1Short-term risks (0-2 years)
#4🔵Asset bubble burst53.3Medium-term risks (3-5 years)
#5🟣 IT infrastructure breakdown53.3Medium-term risks (3-5 years)
#6🔵Price instability52.9Medium-term risks (3-5 years)
#7🟢Extreme weather events52.7Short-term risks (0-2 years)
#8🔵Commodity shocks52.7Medium-term risks (3-5 years)
#9🔵Debt crises52.3Medium-term risks (3-5 years)
#10🟠State collapse51.8Long-term (5-10 years)

Through this perspective, COVID-19 (and its variants) remains high in the next two years as the world scrambles to return to normal.

It’s also clear that more economic risks are taking center stage, from an asset bubble burst to price instability that could have a profound effect over the next five years.

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