Even among those saving for retirement, a home or college tuition, there are wide gaps in financial literacy when it comes to investing, according to a study by Stash.
Stash, a digital investment advisor based in New york City, surveyed more than 26,000 of its investors and 1,100 individuals from the general population about their investment practices in February. The results results showed that even those who said they were taking steps to plan for the future lacked basic financial literacy when it came to investments.
Out of those surveyed, 41 percent did not understand that a diversified portfolio was “a safer investment than a single stock,” and 26 percent believed a moderate investment should return over 16 percent, annually.
The S&P 500 index from 2007 to 2016, which includes the financial crisis and a long bull run, has an annualized return of 8.65 percent, according to the Federal Reserve.
“Most Americans know they need to be saving and investing for their futures, but they do not understand the fundamentals of what that entails,” Stash Co-Founder and CEO Brandon Krieg said.
Investment ability by Millennials, who will be on the receiving end of the greatest generational wealth transfer in U.S. history, was somewhat perplexing. The majority of Millennials surveyed – more than 61 percent – said they were saving for retirement, but only 48 percent said they contribute to a 401(k). Sixty-one percent use a traditional savings account.
Not all companies offer their employees a 401(k)s and it's possible some of those who aren’t contributing to one are saving money in an IRA (the survey showed as many as 54 percent of respondents used either a ROTH or traditional IRA). But assuming those who aren’t contributing to a 401(k) are putting money in an IRA feels like a stretch, given other results of the survey.
A remarkable 40 percent of respondents across all generations “did not know how inflation works,” 38 percent said they do not understand the concept of compound investing, and 16 percent didn’t know if they should prefer a higher or lower interest rate on a mortgage.