Don’t Trust American Investors

Something has been bothering me about the debate over whether or how to let individuals have more control over how Social Security funds get invested. Finally I realized that it was this bit of run-of-the-mill stump salesmanship: “I trust individual Americans,” George W. Bush said, when floating his own plan in May. “I trust Americans to make their own decisions and manage their own money.”

George W. Bush’s trust is misplaced. It’s true that more Americans than ever have money in the market, but it’s not true that even those who have flung themselves into stocks and funds with abandon really know what they’re doing. Anecdotally, I’ve known this for a long time, because as an employee of various financially oriented publications, I have for years been routinely cornered at social events by a variety of very smart people who then proceeded to ask for market advice that made it painfully clear how little they understood the subject.

More recently, I’ve just read the results of an investing quiz that Money magazine and the Vanguard Group (a mutual fund company) gave to about 1,500 mutual fund investors. Not 1,500 people on the street–1,500 people who already have money in the market. The quiz has 20 questions. It’s all basic stuff. The average score was 37 percent correct. That’s pathetic enough on its own, but when you consider it against the backdrop of the greatest explosion of investing-related information in the history of humanity, it’s pretty astonishing.

I won’t belabor this, but here are two sample questions. True or False: Common stocks always provide higher returns than bonds or money-market investments. Only about half of the respondents got that right. (I don’t need to tell you, of course, but the correct answer is “false.”) A multiple-choice question wondered which of the following is not an attribute of mutual funds: diversification, professional management, or guaranteed return. Again, only about half of 1,500 mutual fund investors correctly surmised that mutual funds do not guarantee returns. (In the interest of disclosure, I’m a contributing writer for Money, but I learned about this quiz simply by reading through the August issue. You can also see the quiz here.)

Gov. Bush has been victimized by various pop quizzes already in the past, but you can’t help but wonder how he would do on this test. Then again, I’m sure he has a professional financial adviser or two helping him out. That’s often the case with high-net-worth individuals. They know better than to manage their own money–they go out and hire someone they can trust.

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