by Susan Lyon
It is widely documented that many Americans lack knowledge of critical personal finance principles, but what about when it comes to the basics of online investing?
An online investing survey by NerdWallet Investing found an alarming knowledge gap when it comes to basic investing principles among adult Americans around online brokers, stock trading, 401(k) fees, and several other key concepts in investment management.
The survey revealed these 5 primary findings about the way Americans today – both investors and non-investors alike – think about online investing:
1. Americans Don’t Know What Kind of Account to Trade Stock With: 4 in 5 Americans (81.4%) incorrectly identified the type of account to open in order to trade stock online: a brokerage account.
2. Americans Severely Underestimate Their Total 401(k) Fees: 9 in 10 Americans (92.6%) underestimated the 401(k) fees the average household will pay over a lifetime by several thousand dollars. The real average totals over $150,000 per household.
3. Investors Say Price Matters, Then Ignore Prices: Although half of current online investors (50.3%) cited low prices and fees as the most important factor to them in choosing an online broker, but only 1 in 10 current online investors (11%) actually followed their own advice by comparing costs across accounts.
4. Many Americans Avoid Investing Due to Uncertainty or Fear of Losing Money: Just over a quarter of those not currently investing online say they don’t invest because of either uncertainty on how to get started (13.6%) or not wanting to risk losing money (12.8%). Meanwhile, 39.3% say they do not invest because they do not have enough money to do so.
5. Investors Are Paying Too Much for Trade Execution: Though most respondents (82.9%) said they would not pay extra to have trade execution speed reduced by 1 second, the fact is that many already do without realizing it. A recent InvestingNerd study found that investors could be receiving the same quality execution at a fraction of the cost at a discount brokerage.
Why Investment Literacy Matters: A Pillar of Personal Finance Today
There is a widespread financial illiteracy epidemic in America today, and evidence shows it is growing. While multiple other surveys continue to highlight shortcomings in American education around save-and-spend issues in consumer debt, credit, mortgage, budgeting and financial planning, far fewer have been conducted around investment practices.
Yet personal finance literacy and investment literacy are extremely interrelated – 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. For instance, results from the recent Jump$tart financial survey indicated that,
“High school students who had played the Stock Market Game scored consistently better on the test than those who had taken a personal finance course — and not just in investing, but across all aspects of the test, including credit.”
Education around finance and investment needs to be improved for both youth and adults alike. While there may be no single silver bullet in financial literacy programming, it seems increasingly essential to provide young adults with hands-on investing education and experience as early in the learning process as possible. This will provide the greatest potential for increasing investment and financial literacy – and thereby better financial outcomes – throughout adulthood.
The 2013 Investment Literacy Survey polled a nationally representative sample of 869 American adults from February 9 – 12, 2013 in order to assess understanding of basic investing concepts among the adult American public. The survey polled adult Americans aged 18 and older, asking each respondent 10 questions concerning brokerage accounts, asset classes, investing strategies, stock trading costs, trade execution, and 401(k) plan fees.
For Further Investing Resources, Please Visit:
- NerdWallet Picks: The Overall Best Online Brokerage Accounts
- NerdWallet Research Tool: Online Brokerage Cost Comparison Tool
- Guide: How to Choose A Brokerage Account in 5 Steps
- Frameworks for Investing: Basic Investing Concepts and Asset Classes