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Investors don’t know much about investment basics, Finra finds

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Regulator's Investor Education Foundation survey reveals little knowledge of key concepts.

What are you buying when you invest in a stock? In a bond? According to research from the Finra Investor Education Foundation, two-thirds of adults who hold taxable investment accounts couldn’t correctly answer a basic quiz of investor knowledge that contained those questions and eight others.

In addition to confusion and ignorance of investment basics, such as past performance being no indication of future results, the study also found that many investors are confused about the various fees they pay for investing. Nearly one-third of investors believe they do not pay any fees or expenses at all for their investment accounts or don’t know how much they are paying, according to a release about the study, “Investors in the United States: A Report of the National Financial Capability Study.”

The study was based on data from approximately 2,000 survey respondents who indicated that they have investments held in nonretirement accounts, though most also have retirement accounts.

Other findings include:

• Less than a third (30%) understand that the main advantage of index funds over actively managed funds is generally lower fees and expenses.

• Nearly one in five (18%) are considering investing in cryptocurrencies, and 12% are already invested.

• Among investors who allow a professional to choose investments for them, nearly three-quarters (72%) also make decisions on their own at least some of the time. Similarly, among those who trade online, more than half (51%) also trade through their financial adviser.

• Free online services, websites and blogs are the most frequently cited channels for obtaining investment information (46%), followed closely by newspapers, magazines, and books (42%). Social media is used for investment information by only 17% of respondents.

• Usage of investing-related tools like BrokerCheck or Investor.gov is low — 7% and 9%, respectively. However, in spite of low investor knowledge, investors are less concerned about investment fraud. Investor confidence in the ability of regulators to prevent fraud has increased.

• Investors are more likely to overestimate than underestimate their portfolio’s performance. Only 4% think their portfolio will underperform the market, compared to 29% who think their portfolio will outperform. Men are more likely than women to believe they will beat the market (32% versus 25%).

• When asked how they responded to the precipitous stock market drop in February 2018, only 7% of investors reported selling securities. More than one in five (22%) took the event as an opportunity to buy more stocks.