How much does the average person know about investing?
According to American Century Investments’ “On Plan I.Q. Quiz,” a 10-question test taken by more than 800 investors, knowledge of some of the most basic investment concepts is poor. On average, participants selected about half of the correct responses on the multiple-choice test, which was given to individuals who have investments outside of a company retirement plan.
“While the trend over the last few decades has been for Americans to assume more ownership of their financial futures, many still don’t grasp some of the most essential investment concepts, leaving them ill-equipped to achieve their financial goals,” said Doug Lockwood, vice president of investor guidance at American Century Investments.
According to the survey, portfolio rebalancing is the concept that confuses investors the most. When presented with three statements about rebalancing, only 13 percent selected the correct response.
While the largest proportion of respondents recognized that rebalancing returns the portfolio back “to its ideal asset allocation mix,” participants failed to grasp other aspects. Test takers appeared most confused by the notion that rebalancing often entails selling some of the investments that have performed best and buying more of those that have lagged.
Though the test participants also struggled with definitions of other common investment terms and concepts, investors scored better on questions related to basic investment practices. For example, 71 percent understood that a “well-diversified portfolio will experience less volatility.”
Regardless of their investing knowledge, investors are about evenly split between those who are confident they’ll reach their long-term savings plan and those who are not.
“Financial empowerment begins with quality financial education and guidance,” said Lockwood.
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