Just 11% of affluent investors scored an A on an eight-question investment literacy quiz, according to the recent John Hancock Investor Sentiment Survey.
Another 20% scored high enough to earn a B, but 22% received a D and 23% received an F.
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.
Ninety-four percent 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. And only 62% understand that the price of a bond or bond fund decreases as interest rates rise.
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.
However, investors struggled in determining the better retirement savings strategy when 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.”
Nearly four in 10 were able to choose the second alternative as the better strategy. Almost half said the first choice was correct, and 16% said the two strategies were the same.