Known as the “Big Five,” five questions can predict your ability to make good financial decisions. This is the conclusion drawn by researchers who conducted a study between 2012 and 2018 of 1,500 Americans to test basic financial knowledge.

The study “represents one of the nation’s first efforts to collect and analyze longitudinal data linking financial literacy to the financial outcomes of individual Americans over a multi-year period,” said FINRA (Financial Industry Regulatory Authority) Foundation President Gerri Walsh. Longitudinal studies follow the same people over a period of time to see what changes occur.

The FINRA Investor Education Foundation (FINRA Foundation) conducted the study together with the University of Southern California’s Center for Economic and Social Research, and The George Washington University’s Global Financial Literacy Excellence Center (GFLEC).

The research brief, “The Stability and Predictive Power of Financial Literacy: Evidence From Longitudinal Data,” was released Thursday.

Researchers concluded that “financial literacy has significant predictive power for future financial outcomes, even after controlling for baseline financial characteristics and a wide set of demographic and individual characteristics that influence financial decision making.”

The Big Five cover topics related to everyday economic and financial issues like risk diversification, how interest affects savings accounts and mortgages, and how inflation works. The questions were developed by the FINRA Foundation National Financial Capability Study (NFCS).

Researchers found that answering one additional question correctly (for example, answering two questions correctly instead of one) in 2012 “increased the likelihood that a respondent could meet a $2,000 unexpected expense in 2018 by 8%. Answering two questions correctly increased the likelihood by 16%, and three by 24%.”

The study focused on six different financial outcomes, three positive and three negative, and found that financial literacy in 2012 was “not statistically related to any of the negative financial outcomes documented in 2018, such as costly credit card behaviors or the use of alternative financial services, including auto title or payday loans, rapid refunds, pawn shops or rent-to-own shops.” The positive outcomes included being financially satisfied, planning for retirement and handling the $2,000 unexpected expense.

From my perspective as an advocate of financial literacy education, these are momentous outcomes. They underline the interplay between financial literacy and the ability to make good financial decisions.

From my perspective as a money manager who focuses on retirement portfolios, I am encouraged by Annamaria Lusardi’s comment: "We found that people with greater financial knowledge were more likely to plan for retirement and be able to cope with a $2,000 unexpected shock. Financial education and workplace financial wellness programs need to be fundamental pieces of rebuilding the financial well-being of Americans." Lusardi is the academic director of GFLEC and a professor at George Washington University.

I’d like to see more engagement with young people just starting their working careers to teach the value of saving early and the benefit of compounding over a long horizon. I’d also like to see financial basics taught at the grade school level. Everyone needs to learn how to save and invest for good reason: Someday they will need to create retirement income.

Share this link of the Big Five questions (surveymonkey.com/r/Big5FinLitQuiz) with your family and friends. Three of the five questions made up the “Big Three” survey, which I wrote about in February. Everyone should know the answers to these five questions.

On another note, I invite you to join me at a free virtual presentation, “Why a Portfolio Review is Important and How to Do It,” on Thursday, Nov. 12, at 10:00 a.m., sponsored by the Greenwich (Connecticut) Library. To register, go to tinyurl.com/yy3fu4qp or contact Yang Wang, 203-622-7924, ywang@greenwichlibrary.org. This is part of the library’s financial and investment programs.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

When I speak with investors, whether they invest on their own or with the help of financial professionals, I’m always curious about how they monitor progress. How do they know they are on track? How do they judge performance? Are they happy with the results?

Some tell me they only have time to quickly compare their current brokerage statement balances with earlier balances to get a sense of performance. Being ahead is better than being behind.

That leaves me wondering even more. Is that enough? To give you context, some (not all) financial firms do report performance to their clients in a way that addresses goals and how they are being met on a risk-adjusted basis. That is, they report to clients on a regular basis on progress being made or not made and the risk taken on to achieve that progress.

Before one can do that, goals need to be identified. Very simply: What are your goals, and what’s the path to reaching them?

If you are not making that type of assessment, I challenge you: It may be time to redefine your job as an investor to include a strategic plan that you can use to measure your progress toward one or more specific goals.

In the financial industry, that is achieved through an investment policy statement, or IPS.

Very simply, an IPS is a statement of goals, how you plan to reach them and how you will measure progress to make sure you are on track.

While an IPS is usually a document that an investment firm provides clients, there is no reason you can’t have one for yourself if you are investing on your own. Everyone who wants to be a successful investor needs to have a formal or informal IPS.

To get started on your own, I recommend Morningstar’s Investment Policy Worksheet, which you can find online at tinyurl.com/y5xgkr9r.

The worksheet takes you through six sections: 1) a summary of where you are currently, including how much of a loss you can “accept” over different time periods; 2) your financial goals; 3) your investment philosophy, which goes into what is important to you as an investor and your assessment of risk; 4) your philosophy about taxes; 5) your investment selection criteria; and 6) your monitoring procedures.

Yes, monitoring comes at the end, after considering all the other factors that drive the success or failure of an investment program, including the very important element of risk. How else could you possibly know if you are on track?

Returning to my discussions with investors, over the years, I have found that when talking about performance, risk is not mentioned. Someone who goes through the IPS process will need to address risk and have a sense of what to do in a rapidly declining market such as we experienced this year, when the S&P 500 Index fell 34% from Feb. 19 through March 23.

To learn more about the IPS, an excellent publication comes from the CFA Institute. The institute is a nonprofit whose goal is to build a better world for investors. The publication, “Elements of an Investment Policy Statement for Individual Investors,” is available for free online at tinyurl.com/yxehcgwm.

On another note, no matter where you are located, I invite you to join me at a free virtual presentation, “Investing in a Coronavirus Stock Market,” on Wednesday, Oct. 28, at 10:00 a.m., sponsored by the Greenwich (Connecticut) Library. To register, go to tinyurl.com/y36nzo7n or contact Yang Wang, 203-622-7924, ywang@greenwichlibrary.org. This is part of the library’s financial and investment programs.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

“Matt,” a 65-year-old reader of this column, is about to retire with a substantial 401(k). He has never invested on his own, only through his 401(k). Luckily, his pension and Social Security retirement benefits cover the amount of money he needs to live on to support himself right now.

He wants to know: Where do I turn for expertise if I’m not comfortable with a commissioned salesperson? That question assumes that Matt will roll over his 401(k) to an IRA held at a brokerage firm -- or he may want advice while keeping the 401(k) intact.

Matt is not alone with this dilemma: Any 401(k) participant who has not invested on his own faces the same questions. No matter who Matt retains, there will be an information imbalance between him and the financial professional. (The same holds true for a surviving spouse who was not actively engaged in the financial provider-client relationship during the deceased spouse’s lifetime.)

Should Matt stay with the 401(k)? Since he has been adept at making investment choices for the 401(k), that may be an option. His employer has selected the mutual fund menu for the 401(k) plan, which makes a participant’s job on investment selection much easier than choosing from the universe of investment options.

If he does stay with the 401(k), should Matt change his investment selections in any way? Should he continue making investment choices as he has in the past? Should he change course?

He would need to do so if his pension and Social Security did not cover his lifestyle expenses, but that’s not Matt’s challenge. (Let me know if you have such a situation that you would like to discuss in a future column by emailing me at readers@juliejason.com.)

Another option for Matt is to roll over his 401(k) into an IRA.

If you search online for 401(k) rollovers, you’ll discover a number of options. To find a firm that provides services through salaried personnel, some additional research is necessary.

Since last summer, a new U.S. Securities and Exchange Commission disclosure document makes the search easier. Form CRS provides compensation information. Compensation is a potential conflict of interest.

You’ll look for the answer to this question: “How do your financial professionals make money?”

This is a quote from the CRS of one well-known firm that provides brokerage services: “Our broker-dealer representatives are salaried employees who are not paid commissions for products sold, transactions executed, or the amount of assets serviced.”

Form CRS will help answer other questions as well. For example, does the firm have disciplinary disclosures, how is the firm paid and what are potential conflicts of interest?

You can find a firm’s Form CRS on the SEC website (Investor.gov/crs) by searching for the company’s name.

If you are interviewing firms, compare their Form CRS responses. If you have questions about how to do that, let me know -- a story for another column.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION