Survey Reveals Need for Investment Knowledge

August 12, 2013 (PLANSPONSOR.com) - Just 11% of investors scored an 'A' on an eight-question investment literacy quiz given by John Hancock.

According to the recent John Hancock Investor Sentiment Survey, another 20% scored a ‘B,’ but 22% received a ‘D’ and 23% received an ‘F.’

The survey, performed quarterly among affluent investors, found investors were able to select correct answers to questions about financial concepts or product definitions, but most exhibited significant knowledge gaps. When it came to correctly answering a question about an optimal retirement savings strategy, knowledge declined further, with only 37% able to choose the correct answer.  

When asked to choose between saving “$1,000 per year from age 35 to 65 in an account earning eight percent interest” and saving “$1,000 per year from age 25 to 35 in an account earning eight percent a year and then stopping saving,” nearly four in 10 were able to choose the second alternative as the better strategy. Nearly half said the first choice was correct, and 16% said the two strategies were the same.

Almost all investors surveyed (94%) properly identified the definition of asset allocation as “a method of assigning your financial contributions to different risk classes of investments.” Dollar cost-averaging also was widely understood (85%) as “when you purchase the same dollar amount of investments each month so when share prices are low you get more shares, and when share prices are high you get fewer shares.”

However, when asked about the objective of index funds, which “seek to match the investment returns of a specified stock or bond benchmark,” roughly only six in 10 were able to answer correctly. Sixty-two percent understand that the price of a bond or bond fund decreases as interest rates rise.

Investors are clear about the tax treatment of Roth IRAs, with three-fourths stating that a Roth IRA is purchased with after-tax dollars. Seventy-seven percent correctly stated that term life insurance is less likely to have cash value than permanent life insurance. Most investors (73%) believe, correctly, that stocks have generated the best average returns over the last 20 years.

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