Even average levels of financial literacy can add up to 1.5 per cent in annual investment returns, a new Allianz analysis suggests.
After assessing the financial knowledge of survey respondents in five countries, the latest Allianz Global Wealth Report found those with a lower level of money skills tended to allocate more to cash.
“In general, smart savings behavior is the key to higher wealth growth as returns increase with the level of financial literacy,” the paper says. “The difference between low and average financial literacy can reach 1.5pp p.a. Over long investment periods, financial illiteracy can cost a fortune, literally.”
While the financial literacy dividend varies widely between regions, the Allianz data shows, for example, Australian investors with better money knowledge would’ve seen real annualised returns of 6 per cent over the last 20 years compared to 4 per cent for their least financially savvy counterparts.
In dollar terms Australians with high financial literacy would’ve earned an extra €5,000 per year more than those with low money skills: even average financial knowledge translated to an extra €4,690 in the pocked each year, the report says.
“… the difference in returns between average financial literacy and high financial literacy is small. The portfolios of these two investor types are already largely similar,” the Allianz study says.
Only US investors with low financial literacy have an annual return gap of less than 1 per cent (0.8 per cent) below the averagely money-educated, which Allianz attributes to the “relatively high share of equities” in the country even among the financially ignorant.
In general, investors in ‘Anglo-Saxon’ countries garner higher returns due to “the institutional framework that ensures the widespread use of funded pension schemes” and more-developed stock markets, the report says.
The link between better financial literacy and higher returns, however, “is by no means self-evident”, according to Allianz.
“For the period observed also includes the years 2008 and 2022, in which equity investors (2008) and bond investors (2022) lost a lot of ground. These were disastrous years for the ‘pros’, when the default option ‘cash’ proved to be the far better alternative.”
But in a wide-ranging report, Allianz found much disparity in savings styles, absolute wealth and distribution gaps across the world.
Even after a rough 2022 for markets, “global household financial assets were still nearly 19% above pre-Covid-19 levels at the end of last year” – adjusted for inflation, however, the wealth increase amounts to only 6.6 per cent above the 2019 benchmark (and net negative in Europe).
Despite a market recovery of sorts in 2023, the Allianz study says the “average growth of financial assets is likely to hover between +4% and +5% over the next three years, under the assumption of ‘normal’ stock market returns”.
“But like the weather, which gets more extreme amid climate change, more market swings are to be expected in the new geopolitical and economic landscape. ‘Normal’ years might rather become the exception.”
Furthermore, the report highlights entrenched concentration of wealth at the top of the pyramid as a serious threat to global stability.
“High inequality has been seen as one of the great social challenges for years – but nothing has been done about it. Cementing a distribution situation that is perceived as unjust is a creeping social poison. And the challenge is not getting any smaller. In the past decade, monetary and fiscal policy could operate almost without restraint.
“But the next few years promise much more difficult conditions to initiate a turnaround in wealth distribution.”
And in what seems like a statistical glitch, NZ sits near the top of the table in the Allianz global rankings with a national net financial assets of almost €118,00 per capita compared to over €253,000 in the US and €92,630 in Australia as at the end of 2022.
The report was authored by a stable of Allianz experts including chief economist, Ludovic Subran.