Most Americans Are Investing Illiterate
1:30 pm, March 21st | by Colette McIntyre
A new online survey by InvestingNerd found that financial illiteracy is alarmingly rampant in the US: most Americans do not understand key concepts in investing like brokerage accounts, stock trading, and 401(k) fees. (Now’s not the time to admit that I don’t understand how savings accounts work, right…?)
After polling 869 Americans aged 18 and older, the 2013 Investment Literacy Survey determined that Americans suffer from major misconceptions about online investing. 81.4 percent of Americans are unable to correctly identify the type of account needed to trade stock online (answer: a brokerage account) and 92.6 percent grossly underestimate the longterm costs of a 401(k). The 401(k) fees an average household will pay over a lifetime totals over $150,000 — survey-takers guessed several thousand dollars less.
While a little over half of current online investors claim that low prices and fees are the most important factor in their selection of an online broker, few actually follow through and compare prices: just 11 percent of current online investors compare costs across accounts. And while 82.9 percent of those surveyed said they wouldn’t pay extra to have trade execution speed reduced by one second, as it stands, many already do. InvestingNerd discovered that investors could be receiving the same quality execution for a far lower cost.
Why aren’t most Americans investing? Well 39.9 percent say they don’t have the money to invest, 12.8 percent find the prospect too risky, and 13.6 percent just don’t know where to start.
The dangers of such widespread financial illiteracy are well-documented; as a 2010 New Yorker article on the matter explained, the issue has become more dire since “people now have to take so much responsibility for their financial lives.”
Pensions have been replaced with 401(k)s; many workers have to buy their own health insurance; and so on. The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The decisions are more numerous and complex than ever before
Investment literary has a strong correlation with personal finance literacy, NerdWallet writes:
Not only do they include overlapping topics in financial planning, and if anything, recent research has shown that having a good understanding of one can improve one’s working knowledge of the other. Important to note is that this interrelation appears to go both ways – not only can personal finance education better investment knowledge, but a solid understanding of investing principles can help one’s all around grasp of various aspects of personal finance.
[Photo via Movie Photo Gallery]