Poll: Americans Don't Know Investment Concepts, Terms

April 7, 2005 (PLANSPONSOR.com) - Only 2% of respondents to a basic investment knowledge test had perfect scores, indicating that American's understanding of investment and financial concepts is poor.

On average, only about 50% of questions were answered correctly, according to American Century, who conducted the “On Plan IQ Test,” which was given to people with investments outside of a company retirement plan.

The Test

According to the survey results, portfolio rebalancing is the concept that confuses investors the most.

When respondents were presented with three true statements about rebalancing, only 13% were able to select the correct response, which was, of course, “all of the above”. While 37% of respondents recognized that rebalancing returns the portfolio back “to its ideal asset allocation mix,” they did not seem to understand other aspects of rebalancing. Most confusing to them was the notion that rebalancing can often entail selling some of the investments that have performed best and buying more of those that have lagged – only 2% of respondents selected this answer, which also was correct.

Respondents were also asked about asset allocation (of which they knew very little about), and common investment terms.

Respondents scored better on questions related to basic investment practices, however. Over 70% understood that a “well-diversified portfolio will experience less volatility,” while 80% understood that tax-deferred means that “taxes are paid at some point in the future. Seventy-three percent of respondents correctly identified the best reason for getting an early start on a long-term investment plan as “the earlier you start, the more time your investments have to work in your favor with compounding.”

Ranking Their Knowledge

The survey also shows that at least investors aren’t confident that they actually know a whole lot.When asked to rank their knowledge, the largest portion of participants (31%) rated themselves a three on a five-point scale when asked about their knowledge of basic investment principles. Thirty percent ranked themselves a one or two, while 38% ranked their knowledge as a four or a five.

Social Security

Respondents were also skeptical about Social Security, with many investors not expecting this entitlement program to be a significant source of retirement income. Nearly half of the investors polled (47%) believe that their own savings and investments will be their largest source of income after they retire, while only 13% report that Social Security will provide the largest portion of retirement income.

The survey was conducted by American Century of 807 individuals who have investments outside their company’s retirement plan in individual stocks or stock mutual funds, individual bonds or bond mutual funds, and other mutual funds such as money market mutual funds.