The US: a country of financially illiterate investors

Over the last decade, the number of Americans who, directly or indirectly, own stocks has been between 54 percent to 67 percent according to Gallup.  These huge numbers (even bigger if we take into account investors in fixed income) should imply a deep knowledge of the market, right?

Not at all.

“Quantitative studies conducted from 2006 to the present on the financial literacy of U.S. retail investors conclude overwhelmingly that American investors lack essential knowledge of the most rudimentary financial concepts: inflation, bond prices, interest rates, mortgages, and the value of risk.

“Consequently, it is not surprising that investors do not understand advanced financial concepts such as the difference between stocks and bonds, the role of the stock market, and the value of portfolio diversification.”

So said the SEC in a document released last December. Now, in another one, it gives a more glaring example of that financial illiteracy. A financial illiteracy more worrisome for it is unknown by its victims.  In other words: American investors do not know how much they do not know about the market.  So much for Donald Rumsfeld’s “unknown unknowns.”

Rumsfeld’s “unknown unknowns” led the U.S. into Iraq in search of weapons of mass destruction that did not exist and terrorists who were not there.  Now, the same philosophy can guide Americans into the financial market in search of money that they do not know how to get.  Let’s take an example: according to the SEC, the polls show a majority of people say they understand a fee schedule; however, when presented with one, only 28.9 percent really understand it.

After the unravelling of Iraq, Rumsfeld said that the U.S. had had, “a catastrophic success.” It seems that another one is in the waiting for the American public.