Many investors have a limited understanding of basic investing principles, including the assessment of risk and importance of diversification, according to survey results from AMG Funds.

AMG Funds released new findings from its annual investor survey, which polled 1,000 individual investors with over $250,000 in household investable assets. 

“Our study highlights the ongoing need for professional financial advice, even though investors may not fully recognize its worth,” Jeffrey T. Cerutti, CEO of AMG Funds, said in a statement. “Given the proliferation of investment options along with evolving technology, financial advisors must demonstrate the value to investors of working with a qualified professional. To that end, they should make a concerted effort to educate current and prospective clients on managing their portfolio toward financial goals, including how to best manage risk and utilize diversification, as well as optimal asset class allocations.”

Seventy-three percent of investors surveyed had a financial advisor. However, the survey also finds that there is “substantial room for improvement” in investors’ financial IQ.

While more than half of surveyed investors have primary investment goals that require diversification and risk management to succeed, the survey finds that only 9% of survey respondents could correctly identify market risk measures. In addition, fewer than 10% of investors surveyed identified beta and/or standard deviation as risk measurement tools.

According to the survey, 42% of the survey respondents were able to identify reasons for the importance of diversification in investing. The survey finds that one in five investors is concerned about diversification in their own portfolios, while only 19% of respondents are aware that diversification requires investing across asset classes as opposed to choosing only a broad selection of equities.

According to survey results, millennials’ understanding of diversification concepts is weak compared with older investors’. One in 10 millennials understands the benefits of diversification, compared with 50% of boomers, the survey finds. AMG Funds notes, however, that there remains “room for improvement” across all age groups.

According to AMG Funds, “41% of investors are rebalancing their portfolio quarterly or more often, but their lack of understanding puts their reasoning into question.”

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