Americans have trouble with investment literacy, according to a new report.
One of the findings was a troubling lack of investment literacy.
Here is the report’s conclusion, “Only a third of respondents are able to answer more than half of the 10 investing quiz questions correctly, and the average number of questions answered correctly is 4.7. Nearly half of respondents (46%) think that the past performance of an investment is a good indicator of future results. Less than a third (30%) understand that the main advantage of index funds over actively managed funds is generally lower fees and expenses.”
Investors are also confused by the fees they pay, according to the report, “Fourteen percent of all respondents do not think they pay any kind of fee for investing, and 17% say they do not know how much they pay. Among mutual fund owners, nearly a third (32%) believe they do not pay mutual fund fees or expenses.”
For the investment literacy test, the questions asked of investors, including ten multiple-choice questions.
The first question was a true/false and asked, “In general, investments that are riskier tend to provide higher returns over time than investments with less risk.”
Seventy-four percent answered correctly that this was true; however, only twenty-two percent of respondents knew what selling a stock short meant.
Investors also had difficulty answering a question on buying stock on margin.
The question was, “You invest $500 to buy $1,000 worth of stock on margin. The value of the stock drops by 50%. You sell it. Approximately how much of your original $500 investment are you left with in the end?”
Only twenty-three percent of respondents correctly answered that the value would be zero.
The report continued, “Correct answers to individual quiz questions range from 74% for the risk and return the question to 22% for the question on selling short. The questions on selling short and buying on margin have the most incorrect answers, with more than half of respondents answering each incorrectly (55% and 53%, respectively). Among those who say they have purchased on margin, more than three-quarters (79%) answer the margin question incorrectly.
“Findings from two new quiz questions in the 2018 Investor Survey are somewhat alarming. Nearly half of respondents (46%) think that past performance is a good indicator of future results. Less than a third (30%) understand that the main advantage of index funds over actively managed funds is generally lower fees and expenses.”
The report also found that Americans are generally aware of crypto-currency, and younger folks are more likely to trade in crypto.
Here is from the report, “A large majority of investors are aware of cryptocurrencies (85%). Nearly one in five (18%) are considering investing in cryptocurrencies, and 12% are already invested. While awareness is consistent across age groups and portfolio values, younger investors (ages 18 to 34) and those with portfolios of less than $50,000 are much more likely than average to consider cryptocurrency investments and invest in them.”
FINRA is a self-regulatory organization (SRO); it was created in 2007 when the regulatory arms of the NYSE and NASD merged.