Americans are well known for having a poor grasp of their personal finances in general, but what about when it comes to the particulars of online investing? As more and more retail investors prepare to take the stock market plunge, it's alarming to learn that America's collective investing knowledge is bad - very bad.
NerdWallet Investing conducted a new study that finds Americans have a low IQ when it comes to online investing. In an effort to shed some light on this topic, NerdWallet Investing surveyed 869 American adults aged 18 and older on a variety of investment management issues from finding online brokers to understanding 401 (k) fees. The questions respondents scored most poorly on reveal a lot about investing knowledge today.
These 3 shortcomings in investor knowledge highlight lessons Americans need to take to heart as they get started investing and improving their knowledge of their options:
1. Learn the ABCs of Investing Upfront
In NerdWallet Investing 's Investment Literacy Survey, 4 in 5 Americans polled incorrectly identified the type of account needed to trade stock online. When given options including checking accounts, savings accounts, Roth IRA, CDs, and other types of online accounts, most respondents selected the wrong choice.
The vast majority did not know what a brokerage account was, or realize that a brokerage account is the right type of account needed to trade online. Note to investors: learn the very basics before you take the plunge.
2. Detect Hidden Fees Before They Pop Up
9 in 10 Americans polled severely underestimated the 401(k) fees the average household will pay over a lifetime by several thousand dollars, most citing numbers in the low thousands.
The reality is much worse. A recent retirement study by Demos found that couples totaled over $155,000 in 401(k) fees over the average lifetime. The lesson: by learning your total fees and costs before opening and funding any kind of retirement plan or brokerage account, you can save boatloads of money over time.
3. Shop Around for the Best Price and Value
Like with any consumer need, investors say price matters the most to them - but the data shows they didn't follow their own advice.
Although half of current online investors cited low prices and fees as the most important factor to them when choosing an online broker, only 1 in 10 investors actually chose to compare costs across brokerage accounts.
Advice to Novice Investors:
Based on the results of NerdWallet Investing's investment literacy survey, the top advice to new investors is crystal clear: calculate your total fees and find the best account for your needs before you start placing trade orders.
Methodology:
NerdWallet Investing's 2013 Investment Literacy Survey polled a nationally representative sample of 869 American adults from February 9 - 12, 2013 in order to assess understanding of basic investing concepts among the adult American public. The survey polled adult Americans aged 18 and older, asking each respondent 10 questions concerning brokerage accounts, asset classes, investing strategies, stock trading costs, trade execution, and 401(k) plan fees.