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Financial literacy is a hot topic in schools, businesses and the media. In 2003, the Financial Literacy and Education Commission was established to improve Americans鈥� financial literacy. Efforts are geared toward education and outreach.

When the market was good, it may have seemed like everyone was a financial expert. But the truest test of financial literacy is what happens when the markets drop. If the past couple of years have taught us anything, it鈥檚 that financial literacy means a lot more than being able to recite a couple of finance-related definitions, balance a checkbook or make a quick buck with one right move in the stock market.

In fact, financial literacy has been defined as the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.

Knowledge itself isn鈥檛 enough. So what does a truly smart investor need in order to be described as financially literate?

A long-term personal plan
Formulating an investment strategy that will work for you depends upon you: your goals, your age and investing timeline and your personal tolerance for risk. Only a plan that takes these elements into account will meet your needs for the long term. Blindly following the herd into a hot deal, or making a choice that doesn鈥檛 fit your long-term goals or personal investment strategy, isn鈥檛 likely to help you achieve your goals. We call this 鈥渃hasing performance,鈥� and no one is very good at it. It鈥檚 also essential that your plan be a long-term vision, so that you can ride out fluctuations in the market while still progressing toward your goals.

A sense of realism
A plan is important; but so is a back-up plan. Even when times are good, it鈥檚 essential to consider, and plan for, the worst case scenario. By realizing that your investments, job, marriage, home value, and more are not guaranteed, you can create a more comprehensive and long-term vision that takes into account bad turns 鈥� in the market or in your personal life. A realistic approach to finances, and solid savings, can help a smart investor withstand difficult times.

A diversified portfolio

You can reduce overall risk by diversifying your investments among different investment classes, thus shielding you somewhat when markets go haywire. Appropriate asset allocation also allows you to combine more moderate investments with riskier ones, balancing your portfolio and reducing risk. Look for solid mutual funds with investment performances that exceed benchmarks. Look at the funds鈥� underlying investments and examine the track record of the fund managers. And remember that an asset allocation that is right for a 20-something is almost certainly not right for a 50-something.

Patience
Resist the urge to tinker with your portfolio when something underperforms for a short period of time, but still meets your investment criteria and fits into your long-term plan. Resist the urge to 鈥渄o something.鈥�

Unless there has been a significant change in your goals or financial situation, your long-term plan is still your best bet to get you where you want to go 鈥� so strive to continue to follow it during periods of market volatility. As a long-term investor, you should have time to recover from any short-term losses. Plus, you鈥檒l be positioned to participate in market recoveries. While reviewing your investments is essential, do it on a quarterly basis so you aren鈥檛 tempted to make changes based on short-term fluctuations in your investment values.

The consequences of making financial decisions without financial literacy are clearly evident in the current economy. Smart, financially-literate investors need more than knowledge of numbers and markets to stay on course when the market goes down or fluctuates wildly. As we teach future generations the foundations of financial literacy, it is essential that we also pass along the values that allow them to combine knowledge with skills and vision to create a lifelong financial plan.

Each time you consult with your financial advisor and review your financial plan, you have an opportunity to grow your own financial literacy so you can create, and pass along, a lifetime of financial well-being.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or [email protected].