Do investors know what they are doing?
Regulators are trying to figure out whether investors know what they are doing. Recent FINRA Foundation studies suggest that they don’t.
According to Gerri Walsh, president of the FINRA Investor Education Foundation and FINRA’s senior vice president for investor education, “FINRA Foundation research indicates that knowledge of key investing concepts is alarmingly low — even among people who own investments outside of a retirement account.”
These are some of the “top takeaways” released Thursday by the FINRA Investor Education Foundation. The results are from its “Investors in the United States: A Report of the National Financial Capability Study,” which focused on “nonretirement accounts.” The takeaways are quotes; my comments follow.
1. Investment knowledge is low: Only a third of investors are able to answer more than half of 10 investing quiz questions correctly.
(Here is an interesting finding: Among those who said they purchased on margin, more than threequarters — 79 percent — answered the margin question incorrectly. FINRA noted the answers to two questions were “somewhat alarming.” They had to do with past performance and index funds. If you are curious, take the test yourself. I’ve reproduced it at surveymonkey.com/r/ InvestorQuiz.)
2. Investment fees are confusing to many investors: Thirtyone percent of investors either believe they do not pay any fees or do not know how much they pay in fees for their nonretirement investments.
(In my experience when presenting to the general public — for example, in continuing education programs — not understanding fees is not at all unusual.)
3. Threequarters of investors feel they have access to the information needed to make investment decisions: Free online services, websites and blogs are the most frequently cited channels for obtaining investment information, followed closely by newspapers, magazines and books. Social media is not yet a major source of information for investors.
(More that 1 of 2 respondents said they use information from the issuer or from financial service companies or financial advisers, as well as friends.)
4. Investors are much more likely to overestimate than underestimate their investment performance: A mere 4 percent think their portfolio will underperform the market, compared to 29 percent who think their portfolio will outperform it.
Men are more likely than women to believe they will beat the market (32 percent vs. 25 percent).
(These data points are truly amazing. I wonder whether the respondents compare these aspirations to the actual results.)
5. Investors appear to take market volatility in stride: When asked how they responded to the precipitous stock market drop in February 2018, only 7 percent of investors reported selling securities. And more than 1 in 5 (22 percent) viewed the event as a buying opportunity.
(My view: Reacting to market moves is random activity; however, if one has a longterm horizon coupled with a plan to buy — say, a diversified market instrument such as an S&P 500 index fund — when there is a market decline, that can lead to positive results.)
Walsh emphasized: “We encourage all investors to see how they stack up by taking our financial literacy and investor knowledge quizzes at usfinancialcapability.org. Doing so will not only introduce and reinforce basic personal finance and investing concepts, but also motivate more Americans to engage in our financial markets and foster their financial wellness.”
What is Walsh’s message to financial professionals?
“Because our research shows that investors use an array of different approaches — free online services, websites and blogs, newspapers, magazines and books — to obtain investment information and to conduct their financial transactions, financial professionals might find it helpful to leverage multiple channels to engage and help clients reach their financial goals. Financial professionals can also mine the study to better understand, upfront, client expectations — including that a large swath of investors believe they will outperform the market.”
To read more about the study, visit usfinancial capability.org/downloads/ NFCS_2018_Inv_Survey_ Full_Report.pdf.
On another note, if you participate in your 401(k) at work, would you like to be recognized as a 401(k) Champion? Apply for the second annual 401(k) Champion Award at juliejason.com/award. The award shines a light on participants who “love” their 401(k)s.