More often than not, when someone asks me about money, they begin with an apology: “I know this might sound like a dumb question, but … ”
It makes me genuinely sad that people feel they must justify their desire for knowledge by admitting ignorance.
Now, I’ll be honest. Sometimes, a question arises that makes me pause — not because the person asking is foolish, but because the lack of basic knowledge is alarming.
Take, for example, savers who contribute to a 401(k) and then ask me how to get started in investing. When I point out that they’re already investing in a diversified portfolio of funds through their workplace retirement accounts, they’re flummoxed. They think investing only means buying individual stocks.
But here’s the thing: I’m thrilled they’re willing to feel embarrassed for a moment to gain clarity.
Money stuff can be complicated. For many people, it can feel like rocket science. But it’s crucial knowledge that will help you better protect yourself. The less you know, the more vulnerable you are to schemers and scammers. And even then, scams have become so sophisticated that fraudsters can manipulate the most experienced investors.
The Finra Investor Education Foundation recently released new data on U.S. retail investors’ attitudes, behaviors and knowledge. Two key findings stood out: the scores from an investing quiz and responses to a hypothetical investment scenario.
The survey results, in particular, are proof that we desperately need more financial literacy. See for yourself: How would you answer the following 10 questions taken from the investor report? (There is only one correct answer per question.)
1. If inflation is 5 percent over a 12-month period, how much would your investments have to grow for you to come out ahead over that time period?
- Less than 5 percent
- 5 percent
- More than 5 percent
- Don’t know
2. In general, investments that are riskier tend to provide higher returns over time than investments with less risk.
- True
- False
- Don’t know
3. If you buy a company’s stock …
- You own a part of the company
- You have lent money to the company
- You are liable for the company’s debts
- The company will return your original investment to you with interest
- Don’t know
4. If you buy a company’s bond …
- You own a part of the company
- You have lent money to the company
- You are liable for the company’s debts
- You can vote on shareholder resolutions
- Don’t know
5. Over the last 20 years in the U.S., the best average returns have been generated by:
- Stocks
- Bonds
- CDs
- Money market accounts
- Precious metals
- Don’t know
6. If a company files for bankruptcy, which of the following securities is most at risk of becoming virtually worthless?
- The company’s preferred stock
- The company’s common stock
- The company’s bonds
- Don’t know
7. The past performance of an investment is a good indicator of future results.
- True
- False
- Don’t know
8. What is the main advantage that index funds have when compared to actively managed funds?
- Index funds are generally less risky in the short term
- Index funds generally have lower fees and expenses
- Index funds are generally less likely to decline in value
- Don’t know
9. Which of the following best explains why many municipal bonds pay lower yields than other government bonds?
- Municipal bonds are lower risk
- There is a greater demand for municipal bonds
- Municipal bonds can be tax-free
- Don’t know
10. If you heard about an investment opportunity that promises a guaranteed, risk-free 25 percent annual return every year for the next five years, would you invest in it?
- Yes
- No
- Don’t know
Here are the answers drawn from the survey, which questioned U.S. adults who own investments outside of retirement accounts.
1. More than 5 percent. The overwhelming majority of investors got this right.
2. True. Most people knew this answer.
3. You own a part of the company. 74 percent of respondents answered correctly.
4. You have lent money to the company. 62 percent of respondents answered correctly.
5. Stocks. Only 52 percent got this right.
6. The company’s common stock. A little over half of the investors answered correctly.
7. False. More people answered this incorrectly (47 percent) than correctly (41 percent).
8. Index funds generally have lower fees and expenses. This stumped a lot of folks. Only 30 percent answered correctly, with 40 percent saying they didn’t know.
9. Municipal bonds can be tax-free. Most investors didn’t know the answer to this question, with only 30 percent getting it right.
10. No. This question was designed to assess whether investors could identify the hallmarks of a fraudulent investment. Half didn’t see a problem with a “guarantee” that would yield an annual “risk-free” 25 percent return every year for five years. An additional 30 percent were unsure.
The purpose of the quiz is not to serve as a trivia exercise. Instead, “the beauty of the data is that you can tie it back to people’s overall financial capability,” Finra Foundation President Gerri Walsh said during a news briefing about the research results.
The most troubling result concerned the investment opportunity. If an offer is pitched as low- or no-risk with a very high return, that’s a low-down, dirty lie.
But this is where financial literacy is essential, “because investors need to know what a very high return is,” said Gary Mottola, Finra Foundation’s research director. “Part of educating investors is to let them know what types of returns they can expect from the various asset classes.”
Never forget this key investing truth: Risk and reward are inseparable partners. High returns are always married to high risk.
By the way, parents, if you did well on the quiz, you can help your young adults better understand financial basics. Younger investors are more likely to discuss investing with their parents, according to the survey.
That’s a good point to remember, especially since a large majority (64 percent) of young adults ages 18 to 34 incorrectly answered “yes” when asked if they would have pursued that “investment opportunity.”
Don’t know? Keep asking until you understand. It’s always better to learn than to stay silent and uninformed. If a question affects your money, don’t let embarrassment prevent you from getting the answer you need.
The post How much do you really know about investing? Take this quiz now. appeared first on Washington Post.
