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> I have long argued that the most important lesson of “financial literacy,” one that is never taught in any “financial literacy” classes, is: If I offer you a

> I have long argued that the most important lesson of “financial literacy,” one that is never taught in any “financial literacy” classes, is: If I offer you a 20% annual risk-free return, am I lying? The answer is yes, of course. UBS was not actually offering a 20% annual risk-free return—the ETN “often yielded 20% or more” but didn’t advertise any fixed interest rate, and it said right on the front page that it was risky—but just knowing that single core fact of financial literacy would be sufficient to guide your investment decision here. “Ooh fun gamble, 20% return, maybe I’ll take a chance on it”: Fine, great, whatever. “Hmm this seems to offer monthly income, and a 20% return would help my retirement, guess I should put all my savings into it”: No, bad, wrong. Brilliant! So much misery would be avoided if people could be taught that simple rule.

FabHK 6y ago
Yes. It is time dependent, of course - you could get 11% on German Bundesanleihen in the early 80s. Having said that, Levine’s rule is sound.
- shuckles 6y ago
  Works if you replace yield with spread, which is the standard convention in finance anyways.
- nradov 6y ago
  At the time there was a very real risk that a Soviet invasion could wipe out your investment.
Melting_Harps 6y ago
> Brilliant! So much misery would be avoided if people could be taught that simple rule. Isn't that not being understood by even the wealthy elite a precursor for a Bernie Madoff? I think 'financial literacy' is an unobtainable panacea when most, even supposed economists, don't have much more than of an insight as to what Money actually is and will simply often repeat what was forced fed to them in school about fiat. The truth is the concept of Money has evolved so much in just the last 10 years, that PhDs and Masters thesis written on topics just 5 years ago are some what moot when seen in this light. As for the notion of a 20% risk-free return is concerned, I think the same adage applies: a fool and his money are soon parted. Just because the person selling you these products wear suits and sit in a bank doesn't mean he isn't a predatory con-artist that is so typical on every street corner. They just legitimize their largess with nice decor, lawyers and lobbyists, but that's about the only difference. But just to be clear, as much as I blame bankers for the financial crisis of 2008 that heavily impacted me despite no actual fault other than being born in the 80s, and these instruments that essentially rob innocent people, I'm also entirely unsympathetic to this occurring: > It worked so well—earning him 18% a year in dividends, on average—that he eventually poured $800,000 into the investments, called leveraged exchange-traded notes, or ETNs. When the coronavirus pandemic hit, he lost almost every penny. Why would you wager your entire retirement on a risky bet instead of cashing out your profits, and MAYBE letting your initial investment (essentially house money) ride in this risky instrument to see potential benefits? Maybe I've become immune to the scams and charlatans with ICOs and alt coin pump-dump scams after 9 years in the Cryptocurrency space, but I'm also well adapted enough as Human being to know that common sense has to prevail when it comes to matters of finance. As an experiment to that end, I occasionally go on WSB just to see how infectious vacuous exuberance is still so rampant post-2008 and it often leads to the same predictable outcome.
ouid 6y ago
basically all of financial literacy is the judicious application of the zero arbitrage principle.
Nemo_bis 6y ago
Sadly, people misunderstand this basic reasoning and think it applies the other way too: if something offers a low return, then it must be safe. Thousands of retail investors in Italy lost all their money in high-risk bonds sold by their banks which offered a low yield. https://www.reuters.com/article/italy-banks-bonds-idUSL8N1490SJ20151221 https://www.reuters.com/article/italy-banks-bonds-idUSL8N149...

FabHK 6y ago

Yes. It is time dependent, of course - you could get 11% on German Bundesanleihen in the early 80s. Having said that, Levine’s rule is sound.

shuckles 6y ago
Works if you replace yield with spread, which is the standard convention in finance anyways.
nradov 6y ago
At the time there was a very real risk that a Soviet invasion could wipe out your investment.

Melting_Harps 6y ago

> Brilliant! So much misery would be avoided if people could be taught that simple rule. Isn't that not being understood by even the wealthy elite a precursor for a Bernie Madoff? I think 'financial literacy' is an unobtainable panacea when most, even supposed economists, don't have much more than of an insight as to what Money actually is and will simply often repeat what was forced fed to them in school about fiat. The truth is the concept of Money has evolved so much in just the last 10 years, that PhDs and Masters thesis written on topics just 5 years ago are some what moot when seen in this light. As for the notion of a 20% risk-free return is concerned, I think the same adage applies: a fool and his money are soon parted. Just because the person selling you these products wear suits and sit in a bank doesn't mean he isn't a predatory con-artist that is so typical on every street corner. They just legitimize their largess with nice decor, lawyers and lobbyists, but that's about the only difference. But just to be clear, as much as I blame bankers for the financial crisis of 2008 that heavily impacted me despite no actual fault other than being born in the 80s, and these instruments that essentially rob innocent people, I'm also entirely unsympathetic to this occurring: > It worked so well—earning him 18% a year in dividends, on average—that he eventually poured $800,000 into the investments, called leveraged exchange-traded notes, or ETNs. When the coronavirus pandemic hit, he lost almost every penny. Why would you wager your entire retirement on a risky bet instead of cashing out your profits, and MAYBE letting your initial investment (essentially house money) ride in this risky instrument to see potential benefits? Maybe I've become immune to the scams and charlatans with ICOs and alt coin pump-dump scams after 9 years in the Cryptocurrency space, but I'm also well adapted enough as Human being to know that common sense has to prevail when it comes to matters of finance. As an experiment to that end, I occasionally go on WSB just to see how infectious vacuous exuberance is still so rampant post-2008 and it often leads to the same predictable outcome.

ouid 6y ago

basically all of financial literacy is the judicious application of the zero arbitrage principle.

Nemo_bis 6y ago

Sadly, people misunderstand this basic reasoning and think it applies the other way too: if something offers a low return, then it must be safe. Thousands of retail investors in Italy lost all their money in high-risk bonds sold by their banks which offered a low yield. https://www.reuters.com/article/italy-banks-bonds-idUSL8N1490SJ20151221 https://www.reuters.com/article/italy-banks-bonds-idUSL8N149...