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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Financial Literacy and Role of the Media

by Chairman Arthur Levitt

U.S. Securities & Exchange Commission

at the Media Studies Center, New York, N.Y.

April 26, 1999

Thank you very much. One of the most important and profitable lessons you can learn in life is how to achieve financial security. Yet too few Americans have had the opportunity to learn the basics about money in school, at work, or at home. So, I'm pleased to be here today to discuss how the media can help to increase the financial security of all Americans.

The media already plays a leading role in giving Americans the facts about saving and investing. But I'd like to discuss how together we can do more; how we extend the promise of opportunity and security to more Americans.

Too often these days, we get caught up with the day-to-day numbers – how many points the Dow soared or plummeted or how many millions the latest IPO netted. With so much focus on what's sizzling and what's fizzling, basic information about saving and investing gets lost. And that basic information can change people's lives.

All over this country, there are important stories. Not necessarily stories that make the evening news or the newspaper headlines. But stories of people who work day in and day out for a better life and a better future. And, many of these important, but untold stories are as profoundly simple as being able to send a daughter to college, buying a first home, taking care of a sick parent, or helping a sibling through a tough financial spot.

And, yet there are other stories that for lack of a better word are tragic; a mother and a father who struggle through their retirement; a middle-aged couple who desperately want to adopt, but can't afford it; a college student who recklessly invests the fruit of his grandfather's life – long labor in a matter of weeks.

With so much at stake, it is absolutely essential that we redouble our efforts to make sure that Americans of every age and income level understand the basics of saving and investing.

Americans Are Increasingly Responsible for
Their Own Financial Security

Today, there are more Americans investing in the stock market than ever before – nearly half of all American households. One of every three people in America invests in a mutual fund. In 1980, that number was one out of 18.

But these numbers have a flip side. What about those Americans who aren't investing or saving? How do they plan on achieving financial security? And what price will America pay if they do not? There are times when we should look at the glass and say, why is it half empty?

Back when most of us saved at a bank, bought whole life insurance, or had a defined benefit plan, the responsibility for investment decisions was in someone else's hands. But that's no longer true.

Today, as more and more of us must take responsibility for our own retirement needs, we have had to jump from the passenger seat to the driver's seat. But many have had to make the switch without the benefit of time behind the wheel.

In the past few decades, we've seen a dramatic transformation in how and where Americans save and invest. At the same time, an unacceptably wide gap has grown between financial knowledge and financial responsibilities. And that gap spells trouble for many Americans.

We're in the Midst of a Financial Literacy Crisis

The plain truth is that we are in the midst of a financial literacy crisis. Too many people don't know how to determine saving and investment objectives or their tolerance for risk. Too many people don't know how to choose an investment, or an investment professional, or where to turn for help.

While 63 percent know the difference between a halfback and a quarterback, only 12 percent know the difference between a load and no-load mutual fund. Millions don't understand the purpose of diversification, or have market expectations that are totally out of line with historic averages. In fact, in one recent survey, most mutual-fund investors thought that the stock market – over the next decade – would gain an annual average of more than 20 percent. That would put the Dow at over 50,000 just ten years from now.

Most troubling of all, sixty-five million American households will probably fail to realize one or more of their major life goals because they have not developed a basic financial plan.

Information Explosion Years ago, the problem was a lack of information. Today, there is a glut of information. But the irony is: Do people have the foundation in the financial basics that will allow them to use that information?

With the explosion of finance-related sites on the Internet, the individual investor has more access to information than ever before – information that up until a few years ago was available only to securities professionals.

The amount of information available today is simply mind- boggling. Indeed, if you were to click through ten new financial websites a day, you could keep going for two and a half years before exhausting the possibilities. And those are just the sites posted in English.

Making Sense of It All
–The Role of the Media

We can't slow the increasing speed of communication, nor would we ever want to. But I believe that we have a responsibility to help people make sense of that information. And that's where the media can play a critical role. Let me suggest three ways you can help:

First, we should work together to raise financial literacy levels through a long-term, national public awareness campaign. We've all heard the important warning that "friends don't let friends drive drunk." But we never hear the message that "friends don't let friends squander their financial future." We should.

We know that the power of the media can help change behavior. If there was any doubt, look at what's happened in Florida. Smoking among middle school children there just dropped 19 percent in one year – the biggest drop in 20 years – thanks to an aggressive media campaign combined with increased education.

Second, the financial literacy message should jump to the front page. It's not enough to reach out only to those Americans who already read the business papers or those who watch the financial news networks. What about those who don't? Let's deliver the message where it needs to be heard – and in a way that will make folks listen.

As I mentioned earlier, behind every financial headline is a very human story with human consequences. We should hear more of those stories. And we need to spotlight them where savers and non-savers alike will see them – on the front page or on the evening news.

Third, let's educate and not just titillate. It's not enough to report that someone lost her college education fund by day-trading – or that someone else lost his retirement savings in a scam he learned about through an online chat room. We should also provide tips for investing wisely and avoiding fraud.

We've seen that financial literacy education can make a difference in people's lives. In fact, a recent study by the National Endowment for Financial Education found that just 10 hours of financial literacy instruction will prompt most teenagers to start saving. And researchers at Virginia Tech found that employers who provide financial education in the workplace are repaid up to 3 times the cost through reduced absenteeism, less time spent at work dealing with personal financial matters, and increased productivity.

What Americans Need To Know

We need to remind Americans that they need to know three things before they can make an informed investment decision:

(1)what are their investment goals;

(2)when will they need the money; and

(3)how much risk can they afford.

Only then can they choose investments that match their investing objectives.

We should emphasize that planning is key to financial success and show investors how to get started. Even among individuals who earn low incomes, savers who have financial plans report having twice as much in savings and investments as those who do not have a plan.

We also need to remind investors that successful investing takes time. Investors need to slow down and read the whole story. They need to get the facts. Is any of us really surprised that many potential investors don't know where to begin?

The Facts on Saving and Investing Campaign
Can Help

To help investors get the facts they need, the SEC and a partnership of nearly 50 government agencies, business groups, and consumer organizations launched the "Facts on Saving and Investing Campaign." Now in its second year, the campaign is an ongoing, grass roots and national effort to motivate Americans to get the facts they need to achieve financial security and avoid costly mistakes. Our slogan is: "Get the facts. It's your money. It's your future."

The campaign can serve as a vital resource for the media. Our partners have developed marvelous tools that help people ask the right questions and get the right answers on money matters. I encourage you to write about – and to print – these tools in your publications, promote them in your broadcasts, and link to them from your websites.

Let me point out just a few:

The American Savings Education Council has a one-page worksheet called the Ballpark Estimate that helps people quickly calculate how much money they should save each year for retirement. Imagine what we could accomplish if we could convince Americans to take just a few minutes out of their busy schedules to focus on their financial future.

For younger people, The Alliance for Investor Education developed an Internet calculator that shows you how a $75 pair of sneakers can cost $4,700. That's how much a 13 year-old could save by retirement by investing that $75 instead of spending it.

Earlier this month, the SEC unveiled a Mutual Fund Cost Calculator on our website. It allows investors to comparison shop and see – in dollars and cents – how mutual fund costs add up over time.

The campaign has a special emphasis this year on young people – those still in school and just entering the workforce. Judging from the results of the 1999 Youth & Money Survey, released by the American Savings Education Council this morning, the emphasis comes not a moment too soon – especially when you consider that teenagers alone spend more than $100 billion dollars a year.

The survey found that two out of three students between the ages of 16 and 22 say they need to know more about their money. But barely half think saving is very important, and even fewer actually save. In fact, 28 percent of the students with credit cards are already rolling over credit card debt.

More disturbing, the survey found that "Forty percent of students are likely to buy a pair of jeans – or something similar they really want – even if they do not have the money to pay for it. And 22 percent would pay for it with a credit card."

An overwhelming number of students surveyed – 94 percent – said they're likely to turn to their parents as a key source of financial information. But nearly one-third say their parents rarely or never discuss setting financial goals with them. And 3 in 10 say their parents don't discuss saving and investing with them.

Let's change that. Parents who lack money smarts will have a tough time raising money-smart children. So let's work together to make sure Americans of all ages and income levels get the facts they need to save, invest, and plan for their financial futures. And let's not graduate another generation of students who've never learned the financial facts of life.

Starting today, securities regulators will visit classrooms to get students and young adults excited about saving for tomorrow. In fact, this afternoon, I plan to visit Martin Luther King High School here in New York City. The media are welcome to join me, but I must warn you, there will be a pop quiz.

We're at a Crossroads

Today, we stand at what may be a defining moment in American economic history. This may someday be described as the era of democratization of American finance. But, if the vast majority of investors are not informed and not educated, opportunity will lose out to ignorance.

In recent years the SEC has been proud to partner with leading news organizations throughout the country to promote financial literacy – mostly through our Investors' Town Meetings. And I thank those media outlets who've worked hard to organize their own investors' education conferences.

Let's continue working together to make sure every American gets the whole story about saving and investing, and let me , if I can, suggest the headline "Get the facts. It's your money. It's your future."

Thank you very much.