Findings from the second quarter 2013 John Hancock Investor Sentiment Survey—a quarterly poll of affluent investors—show a surpriisng lack of knowledge.
Scores from the eight-question investment literacy quiz were as follows:
• 11% of investors scored an “A”
• 20% scored high enough to earn a “B”
• 22% received a “D” and 23% received an “F” resulting in nearly half earning a failing grade
Investors were able to select correct answers to questions about financial concepts or product definitions, but most exhibited significant knowledge gaps. Awareness declined even further when it came to correctly answering a question relating to an optimal retirement savings strategy. Only 37% were able to provide the correct answer.
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.” Eighty-five percent were correct in their understanding of dollar cost-averaging 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 knew the correct response. And only 62% understood that the price of a bond or bond fund decreased as interest rates rose.
Investors are clear about the tax treatment of Roth IRAs, with three-quarters stating that a Roth IRA is purchased with after-tax dollars. Seventy-seven percent correctly responded that term life insurance is less likely to have cash value than permanent life insurance. Almost three-quarters (73 percent) believe—correctly—that stocks have generated the best average returns over the last 20 years.
However, investors struggled in determining the better retirement savings strategy. Respondents were asked to choose between saving “$1,000 per year from age 35 to 65 in an account earning 8% interest” and saving “$1,000 per year from age 25 to 35 in an account earning 8% a year and then stopping saving.”
Almost four in 10 were able to choose the second alternative as the better strategy. Half said the first choice was correct, and 16% said the two strategies were the same.