A matter of knowledge
A comprehensive survey in the United States asked 25,000 adults to rank their financial knowledge. Their responses are somewhat disturbing.
As reported in a recent personal finance article in The Wall Street Journal, almost 75 per cent of the respondents to the latest National Financial Capability Study* regard their level of knowledge as above average.
"But here's the kicker," writes the article's author Carolyn Geer. "When given a simple five-question quiz designed to test their knowledge of basic financial concepts encountered in everyday life, only 39 per cent of respondents were able to correctly answer at least four questions."
For instance, a quarter struggled to understand such an investment basic as the compounding of interest.
In Australia, studies into financial and investment knowledge include Adult Financial Literacy in Australia , a survey undertaken by the Social Science Research Centre. The survey, published in late 2011, focused on such indicators of financial literacy as a person's ability to:
Keep track of their finances including household expenses.
Plan ahead, shown in such ways as saving for retirement, using financial planners and taking insurance cover.
Choose financial products and services by comparing what is available.
Stay informed about financial issues.
Keep control over their finances. This includes saving as well as dealing with debt.
The survey confirms that a person's level of financial literacy tends to reflect such factors as age, education and household income.
Not surprising, the researchers found that respondents to the survey have become more cautious since the GFC with more trying to regularly save (77 per cent or respondents), fewer taking personal loans and more believing they have control over their finances (81 per cent). And interestingly, more investors understand that the market values of even good investments fluctuate.
But one of the kickers of the Adult Financial Literacy in Australia survey is that 53 per cent of respondents say they would not invest in "an investment advertised as having a return well above market rates and no risk". Worryingly, this may suggest that a high percentage may be tempted.
* The National Financial Capability Study is conducted by the educational section of the Financial Industry Regulation Authority in the US.
By Robin Bowerman
Principal & Head of Retail, Vanguard Investments Australia
26th June 2013