As most investors learned from the school of hard knocks, financial markets loathe uncertainty. Better to know than to wonder. Of course, markets don’t take a shine to unpleasant reality either, but at least reasonable certainty can be quickly built into the price of a stock or bond, thus creating potential opportunity. Not knowing what’s around the bend creates a distinctive kind of stress.
It turns out that everyday life works much the same way. A recent study by Yoshihiko Kadoya and Mostafa Saidur Rahim Khan of Hiroshima University found an interesting parallel between a lack of certainty in financial matters and later-life stress levels. Citing evidence that people start to become anxious about their “later years” around the age of 40, the authors asked four basic questions to people between the ages of 40 and 65.
The questions were about inflation, stocks, compound interest and the relationship between interest rates and bond prices. Regression models were used to search for linkages between financial literacy and anxiety later in life while controlling for a myriad of other factors.
The study found that “a lack of financial literacy can help explain late-life anxiety, because financial literacy enables people to become more financially and psychologically prepared for old age.” Not surprisingly, financial literacy was found to be positively correlated to stock-market participation. And for U.S.-based investors, at least, that participation has paid handsome dividends over time.