Retail investors—particularly minorities and the elderly—lack basic financial literacy skills, with many of them failing to understand financial concepts such as compound interest, inflation, diversification, or the differences between stocks and bonds, and investment costs and their impact on investment returns, according to a just-released financial literacy study by the Securities and Exchange Commission (SEC) and the Library of Congress.
The study, released Thursday, was mandated by the Dodd-Frank Act and not only gauges retail investors’ financial literacy skills, but it also describes what investors want to know about financial professionals and investment products and services, as well as when and how investors want to receive such information.
To help understand where retail investors stand in terms of financial literacy, the SEC contracted with the Library of Congress to conduct a review of the quantitative studies on the financial literacy of U.S. retail investors published since 2006. The Library of Congress delivered its own report to the SEC, finding that American investors lack basic financial literacy, including critical knowledge about investment fraud.
Investors, the Library of Congress report said, have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud. Further, certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population and those who are poorly educated, have an even greater lack of investment knowledge than the average general population.