Many in the U.S. may need to do more — and read more — to improve their investing IQ. Here’s how you can do so, according to Covestor portfolio manager Charles Sizemore:
A good investing IQ goes hand in hand with strong financial knowledge and decision-making skills. That’s something that the majority of Americans lack, according to the latest nationwide study that seeks to measure the financial capability of U.S. adults.
The National Financial Capability Study sponsored by the FINRA Investor Education Foundation asked participants five questions that tested their fundamental financial knowledge. They attempted to cover only the basics, such as principles related to risk and diversification, the relationship between bond prices and interest rates, and principles of compound interest and inflation.
Only 39% of those questioned were able to get the right answer for four or more of the questions.
“In other words, the average investor would have a failing grade,” says Charles Sizemore, portfolio manager on the Covestor platform.”This is very troubling because never before have investors had to take this much responsibility for their own finances. They lack the basic knowledge they need to invest and manage their financial lives.”
Particularly worrisome was how poorly younger Americans scored on the test. Adults 34 and younger got 2.3 of the questions right, on average, compared with 2.9 for 35-to-54-year-olds, and 3.3 right answers for those 55 and older.
The latest FINRA test echoes a lengthy SEC report released last year that concluded that many investors do not understand simple financial concepts, are not equipped to track the costs of their investments, and lack critical knowledge about how to avoid investment fraud.
There are many organizations that try to do a better job of teaching investors the basics. For its part, FINRA makes available unbiased investor education materials for non-commercial purposes. And of course, there are for-profit courses, seminars, and endless list of books on the subject.
But where do you start?
In his latest Google Hangout interview, Sizemore says to read these three things if you want to start boosting your investment IQ:
1) Read the Financial Times: He calls it the best source available for understanding how current events relate to your investments.
2) “Fooled by Randomness” by Nassim Nicholas Taleb. It’s a book that deals with the frailty of human knowledge as it relates to the markets, and how luck is often mistaken for skill.
3) Go to sites including interactiveadvisors.com to track what other investors are doing in the markets and to learn about the reasons behind their moves.
Check out the Hangout for more.
This replay represents statements made live on July 18, 2013. All opinions included in this material are as of July 18, 2013 and are subject to change. The opinions and views expressed herein are of the portfolio manager and may differ from other managers, or the firm as a whole.