Study: Americans Fail to Understand the ABCs of Online Investing
When it comes to personal finance, Americans are still in the dark – a new study by InvestingNerd shows the same remains true for online investing in particular.
InvestingNerd surveyed more than 800 American adults aged 18 and older, asking each respondent several questions about online brokerage accounts, stock trading costs, and 401(k) planning. The results shed new light on the current state of affairs when it comes to investment literacy in America.
Here’s how Americans scored:
1. What is a brokerage account?
4 in 5 Americans could not identify the right type of account needed to trade stock online: a brokerage account. Many guessed that a checking or savings account would do the trick, or even a CD, but in reality one cannot invest using any of those accounts.
2. Are my 401(k) fees really that high?
9 in 10 Americans significantly underestimated the 401(k) fees the average household will pay over a lifetime by several thousand dollars. The real total fees average over $150,000 per household, according to a recent Demos study.
3. How do I trade stock cheaply without sacrificing quality?
Although half of current online investors cited low prices and fees as the most important factor to them when choosing an online broker, only 1 in 10 investors actually compared costs across all accounts.
4. Why don’t more people invest?
The survey found that many Americans avoid investing altogether due to uncertainty around how to get started (13.6%) or not wanting to risk losing any money (12.8%). A full 39.3% do not have enough money to invest in the first place, they say.
5. Does Trade Execution Speed Really Matter?
An overwhelming majority of respondents – 82.9% – said they would not pay extra to have their trade execution speed on their stock order decreased by 1 second. However, the fact is that many already do without realizing it because many of the same companies are used by big and small brokerage firms alike to execute orders. Indeed, a lot of the time, investors could be receiving the same services at a fraction of the cost at a discount brokerage.
The takeaway for investors:
There is a widespread financial illiteracy epidemic in America today, and it is growing. Despite governmental and non-profit engagement in recent years, as well as the rise of several mandatory financial literacy curriculums in high schools, the state of overall personal financial literacy is still lagging behind expectations.
On the investment management front, this means that financial education is key. Americans looking to dive into the financial markets should be sure to do the math and shop around for the best online broker for their needs to know their costs upfront, so that they can save money on fees while investing.
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.