The Singapore government has been promoting the idea of Lifelong Learning as jobs are increasingly getting disrupted by advances in technology, and the product lifecycle has been getting shorter and shorter. The trend is that learning is now supported through life. One of the problems of having this approach is that the government has only so many resources to allocate to help the citizen. This is mainly focused on helping him maintain his employment – a lot still needs to be done to assist Singaporeans in understanding their financial needs even further.
This article describes a framework for categorising financial knowledge that readers can use as a guide to further their understanding and knowledge of investing. The question is not about what to learn but how to learn.
3 Types of financial knowledge
You can break down aspects of finance to understand what gaps exist in your financial knowledge. As it turns out, investment courses can’t cover all aspects of investing knowledge. Readers can begin to figure out which areas deserve the most significant investment of time and effort.
Financial knowledge can be broken down into three categories :
1) Theoretical knowledge
Theoretical knowledge covers the mathematical, accounting or economic foundations of investing as a discipline.
This would generally include mathematical equations. One example of theoretical knowledge may consist of calculating the standard deviation of a time series, calculating the price-earnings ratio of a stock, or figuring out how a central bank performs monetary policy.
The best place to pick up theoretical knowledge is in school, where you will need to be examined on the topic to meet a reasonable level of understanding. Investment courses will allocate some time to give you the bare minimum to execute on your portfolio.
As the material that covers this area can be dry, theoretical knowledge can maintain its usefulness and validity over time. Sadly, the bulk of theoretical expertise in investing can only be covered by a specialist diploma or degree programs in finance. The Chartered Financial Analyst (CFA) program is the cheapest and most convenient way to get a firm grounding on the theoretical knowledge of investing.
2. Operational knowledge
The second category is operational knowledge which covers the practice of investing and specific characteristics of the market the investor is operating in.
Examples of this information include how to open a brokerage account, execute a limit order, get the cheapest margin account rates, and which stock provides the highest yield at the moment.
This also includes specific investment strategies that tend to change with the times. For example, the permanent portfolio approach of allocating equal weights to four ETFs of different asset classes tend to increase in popularity in bear and sideways markets and become forgotten when markets are experiencing breakneck growth.
It can also include information on the idiosyncracies on specific markets, eg. United Hampshire US REIT currently yields 9.1%.
Operational knowledge cannot be picked up easily in school as it is very dynamic and short-lived. Investment courses can provide a snapshot of the current situation but moving forward, and investors will need to monitor blogs, brokerage reports and Reddit discussion threads to maintain their currency.
3. Personal knowledge
The final category is personal knowledge – a class of knowledge is so private to the investor that it cannot be taught.
For example, how much risk appetite does the investor have?
Someone with a low appetite for risk might not be able to invest more than 30% into equities. At the other end of the spectrum, another person would not mind going all-in into cryptocurrency. Personal knowledge determines the asset allocation of your portfolio and ultimately determines how much leverage you can stomach.
Within the realm of personal knowledge, the investor must know their career paths and how stable their primary source of earnings is. They also need to understand their personalities. Do tiny things affect their sleep at night?
Personal knowledge can be gained through financial planning surveys, but the best way of attaining this wisdom is to invest and have actual events shape the understanding of your personality.
3 Levels of Expertise
It is one thing to talk about categories of financial knowledge, it is another to assess the level of expertise in a topic. The following framework is taken from the book Expert: Understanding the Path to Mastery by Roger Kneebone.
Mastery of any topic and becoming an expert can be divided into three levels:
1. Apprentice
Investors and some financial advisors can spend an entire lifetime at this basic level of proficiency. Completing an apprenticeship means putting in a requisite amount of time building your portfolio, establishing the tools to get market information, and creating a dashboard to monitor your portfolio performance.
At the highest level, an apprentice needs to correct their investment mistakes, exit bad positions and have the psychological tools to minimise regret.
2. Journeyman
At the next level of a journeyman, the investor begins to describe their investment philosophy and even defend it when questioned by others. At this level, the Journeyman can start to craft portfolios to deal with a specific view of the markets and the economy.
Completing this level of proficiency means the ability to improvise and build an investment portfolio that is customised based on your needs, covering strategic issues like linking market cycles to asset allocation and crafting rules on entering and exiting positions.
3. Master
At the level of a master, the investor should be able to pass on their knowledge to others and show them how to craft investment portfolios of theirs. At this stage, knowing is not enough – a teacher would need to anticipate roadblocks to a person’s understanding and try to fill it with materials that can address that.
This is a journey that never ends as the problem set can be pretty broad.
As a trainer, I have to face issues that would stump me. For example, I was not able to answer thoroughly to my satisfaction if the ERM framework could be applied to Shariah Compliant investments.
Combining knowledge categories and levels of expertise
We can combine knowledge categories and levels of expertise with building a 3×3 matrix that can give us an idea of how to plan our learning journey in finance.
- Where there are gaps in basic mathematical knowledge like building an algebraic equation, we can choose to go back to formal schooling to address these gaps.
- Where your mathematical foundation is reasonably strong, an investment course can arm you with information on the latest brokerage rates and how to operationalise your investment portfolio.
Certain aspects of your risk appetite would be challenging to learn without direct engagement in financial markets and a certain degree of personal reflection.
| Theoretical Knowledge | Operational Knowledge | Personal Knowledge | |
| Apprentice | You have the basic grounding on the mathematical foundations of investing. For example, you can calculate risk-adjusted returns and can derive the financial ratio of companies | You know where to get stock price data. You have the tools on hand to manage your portfolio, screen stocks and the time your primary entries into the stock market. | You understand your career situation and personality. Using this self-knowledge, you can decide your asset allocation and risk levels that you can afford to take. |
| Journeyman | You can combine information on market cycles and build a portfolio based on your findings. You also have a dynamic framework to time your market entrances and exits. You can improvise when the situation becomes ambiguous. | You can interpret the material you get on the web, make independent decisions on information, and even find third-party sources to verify your investment thesis. You can also perform some analysis on your own using a spreadsheet or a computer programming language to meet your objective. | You know that your risk appetite shifts with the amount of stress that is affecting you and can even make educated guesses on the risk appetite of someone else, given what you can tell from their behaviour. For example, neurotic personalities should not allocate too much to equities, hurting their mental health. |
| Master | You can teach these basic concepts and anticipate roadblocks to a person’s understanding of the subject matter. | You can show others how to set up their information dashboards, brokerage accounts and independently do DIY investing on their own. | You can guide someone to understand their investment personalities and can even conduct a survey to assist them in greater self-knowledge. |
Summary
This is a meta-level article that attempts to give readers a way to think about how to assess and categorise their proficiency in investing.
To benefit from this article, you should determine which parts are missing from your financial knowledge and decide on a range of interventions to resolve it.
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