Simplicity and clarity. That's what Warren Buffett aims for when he pens his annual letter to shareholders. Unfortunately, that's not what you'll find in much of the financial world -- especially when you're looking for a mutual fund. And that's hurting many investors and would-be investors.
The folks at AARP Financial recently released the results of a study looking at the impact of financial jargon on investor behavior and decision-making. They found:
- Fully 52% of adults surveyed said they've made an investment mistake -- such as owing unnecessary taxes or failing to invest in something in the first place -- because they felt confused by or didn't understand an investment.
- When asked to compare various communications, 82% said their car insurance policy is easier to understand than a mutual fund prospectus, and 79% find prescription-drug inserts easier to understand.
What's so confusing? Well, many people just don't know what a mutual fund's "expense ratio" is. Wouldn't it be simpler to call it an "annual fee"? Or how about "basis points"? Why not just call them what they are -- hundredths of a percent? Similarly, "equities" are stocks, and "fixed-income securities" are usually bonds.
What to do
Financial literacy is critical if we want to succeed with our money. That's why we at the Fool have dedicated ourselves to promoting financial literacy through our Foolanthropy efforts. That's also why we aim to be simple and clear in our own writing, and in the investing newsletter services we issue.
When you invest, look for clear communications from your investments. CEOs should be candid and understandable in their annual letters to shareholders. Toyota
One way to help yourself wade through financial documents is to bite the bullet and learn more about investing. The more you know, the better you'll be able to deal with jargon.
Meanwhile, if you're looking for some top-notch mutual funds and don't feel comfortable going through a 100-page prospectus on your own, give our Motley Fool Champion Funds newsletter a whirl. It looks at funds with excellent track records and smart managers who won't pull the wool over your eyes. Last I checked, its recommendations were beating the market by 19 percentage points on average.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. UPS is a Motley Fool Income Investor recommendation, and Sherwin-Williams is a Motley Fool Stock Advisor pick. The Motley Fool is Fools writing for Fools.