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19 Alarming Things We Learned About Financial Literacy in America

By John Reeves – Updated Apr 7, 2017 at 1:18PM

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It's scary out there, folks.

Last week, the SEC released a wide-ranging report on financial literacy in the United States. Sadly, it was found that "American investors lack essential knowledge of the most rudimentary financial concepts: inflation, bond prices, interest rates, mortgages, and risk." The study ultimately concluded that this lack of financial knowledge will have a serious adverse effect on the ability of Americans to retire comfortably.

We found the conclusions of the study to be extremely discouraging and decided to take a closer look at all 182 pages of it, in addition to an earlier 40-page report on financial literacy by the Library of Congress. The studies focused on basic investor knowledge. Here are some of the alarming things that we discovered:

1. Women may have better instincts when it comes to investing, but they consistently perform worse than men on investor literacy quizzes.

2. A 2008 Health and Retirement Survey concluded that older Americans "lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees." Among the most widespread answer to the questions in the survey was "do not know."

3. In a Wisconsin study from 2010, researchers found that, "low intelligence [EDITOR'S NOTE: The authors of the report probably meant IQ here] and the lack of exposure to mathematics courses in high school correlate with difficulty later in life in managing finances and saving for retirement." The number of mathematics courses was statistically significant in predicting whether those surveyed knew how much money was in their bank and retirement accounts, but the number of English courses wasn't.

4. Across multiple studies, there was considerable uncertainty by respondents about whether stocks were the best long-term asset class.

5. In a 2010 Northwestern Mutual Life Insurance study to determine Americans' general financial knowledge, 69% of the 1,664 participants failed the quiz.

6. In the Northwestern Mutual study, only 32% of the participants could accurately define the term "index fund."

7. In a Financial Industry Regulatory Authority, or FINRA, study in 2009, only 21% of the respondents were correct in knowing that bond prices typically will fall when interest rates rise.

8. Only 52%, in the FINRA study, correctly answered "False" to the following: "Buying a single company stock provides a safer return than a stock mutual fund."

9. The FINRA study also found that young adults performed the worst according to age group; adults aged 45 to 49 performed the best.

10. In a 2008 study of high school seniors, only 36.2% knew that "retirement income provided by a company" is called a "pension."

11. In a Moneytrack/IPT Investing Survey from 2007, only 39% of the participants could correctly define the term "diversification."

12. An Ariel study of 401(k) savings disparities found that African-American and Hispanic workers in the U.S. have lower 401(k) balances and participation rates than their white and Asian counterparts. The study found that more financial education among these groups is needed.

13. An alarming 43% of investors in a 2007 MoneyTrack/IPT Investing Secrets Survey demonstrated a susceptibility to fraud.

14. In the 2008 survey of high-school seniors and college students, scores sank to an all-time low (students began taking the annual survey in 1997).

15. In a 2009 National Financial Capability Study, only 15% of respondents indicated that they had "checked an advisor's background or credentials with a state or federal regulator."

16. Only 51% of participants in a recent online study understood how and when a financial intermediary receives compensation for sales of investment products in a hypothetical example.

17. In the same study, 58.6% of online survey respondents incorrectly answered a question about calculating standard mutual fund fees.

18. A Library of Congress report found that "low levels of financial literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans."

19. 75% of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. Is this a result of people not knowing any better?

This list paints a very grim picture of the state of American financial literacy at the moment. It's easy, of course, to nitpick some of it. For example, a lot of respondents had trouble identifying stocks as providing superior returns over the long term. Given that we just learned that Treasuries have outperformed stocks over the past 30 years, maybe it's understandable that investors were uncertain on that one.

Yes, it may be tempting to challenge various details of the findings, but it would be unwise to reject the overall conclusion. The 19th item on the list, which shows the shockingly low amount of funds that most Americans have put aside for retirement, didn't come from the SEC. Rather, that number came from a recent piece in The New York Times about the grim state of our retirement system. Clearly, we have very serious problems when it comes to understanding how much we need to live comfortably in retirement. And a woeful lack of financial knowledge is partly to blame for that.

So we shouldn't spend too much time wondering whether or not Americans in general are financially literate; it's abundantly clear that we are not. The more relevant (and urgent) questions are: What does this mean? And what should we do about it? In a future commentary, we'll try to answer those questions.

In the meantime, you can read about our "13 Steps to Investing Foolishly" as a great way to brush up on your own financial literacy.

The Motley Fool is investors writing for investors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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