Just 11 percent of investors scored an 'A' on an eight-question investment literacy quiz, according to a new survey.
John Hancock discloses this finding in an Investor Sentiment Survey that polled 1,078 investors about their views of the current economic climate and what represents a good or bad investment given market conditions. Conducted by independent research firm Greenwald & Associates, the poll also asked consumers about their confidence in reaching key financial goals and likelihood of purchasing financial products and services.
One in five of the investors surveyed (20 percent) scored high enough to earn a 'B' in the investor literacy quiz, but nearly half earned a failing grade, with 22 percent receiving a 'D' and 23 percent receiving an 'F,' John Hancock reports.
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 percent able to choose the correct answer.
Almost all investors surveyed (94 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 was also widely understood (85 percent) 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," only about six in ten were able to answer correctly. And only 62 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 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 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 ten were able to choose the second alternative as the better strategy. Almost half said the first choice was correct, and 16 percent said the two strategies were the same.