Comment by mihaic
18 days ago
My most terrible conclusion is that if everyone had perfect financial literacy, the world would be even worse for the younger generation, who's never get any change without some systemic reset to catch up.
So, personally I give everyone I know the standard advice (basket of S&P 500, never pick your own stocks, get some T bills for diversity, etc), I think in the long run this is creating a terrible economy for the young, and the old will eventually pay for it.
This is a widely known trope in the financial circles, often stated as what if everyone only invested in indexes. Firstly for context, we're not even remotely close to a situation like it, with all the rage index investing is today, we're still somewhere in the ballpark of half and half for passive and active investing. Secondly, it's not really a problem, and actually the more financially literate you are, the more you could benefit from that situation. If everyone invests in index funds then the companies in the index get pushed up while the companies that are not in get pushed down. This means that there will be many good companies that are undervalued outside of the index and anyone with the literacy to notice that can buy them and then benefit.
It's not about the fact that you don't have an edge against your peers with financial literacy, you'll always have that. It's the fact that you won't have an edge against your median efficiency elders, who are simply leveraging a much larger capital.
Closing a gap by 2% per year, even over 50 years still means less than tripling an amount (1.02 ^ 50 ~ 2.7). Your edge needs to be significant for exponentiation to work within your lifetime.