NASD INVESTOR LITERACY RESEARCH

Transcription

1 NASD INVESTOR LITERACY RESEARCH Executive Summary Prepared By APPLIED RESEARCH & CONSULTING LLC Wooster St. Third Floor NY, NY Tel: Fax:

2 INTRODUCTION NASD is dedicated to protecting investors and helping to en market integrity. In order to meet this challenge, NASD serves individual investors with a variety of investor education programs. NASD therefore felt it was important to obtain an objective, third-party meament of investor literacy the understanding ordinary investors have of market principles, instruments, organizations and regulations in order to better understand levels of investor knowledge and to identify opportunities to improve education initiatives. On behalf of NASD, Applied Research & Consulting (ARC) conducted a nationallyprojectable survey of individual investors across the United States. Qualified respondents were adult (21-69) investment decision-makers who performed at least one stock, bond, or mutual fund transaction between October 2002 and early April The questionnaire consisted of 55 questions and was administered online from April 11-18, A total of 1086 respondents completed the survey. The margin of error was +/ 3% at a 9 confidence level. This report summarizes the following: Profile of investors who participated in the survey, Investor confidence and investor literacy self-perception, and Investor literacy on 10 basic market questions, including results by investor subgroups. 2

3 INVESTOR PROFILE Respondents in the survey represented a wide range of investors across income, gender, size of investment portfolio and types of investments. Annual household income (D Gender (A3 Prefer not to s More than $150,000 4% Less than $25,000 $100,000 t $150,000 13% $25,000 t $50,000 28% Female 52% Male 48% $75,000 to $100,000 16% $50,000 t $75,000 29% About a quarter of respondents (23%) reported total investment portfolio values of $100,000 or more. Almost a third (32%) valued their investments at less than $10,000. Value of investments (C15) $100,000 - $500,000 18% Over $500,000 Less than $10,000 32% $50,000 - $100,000 17% $10,000 - $50,000 28% Over two-thirds (67%) reported owning stocks, and slightly fewer (60%) reported owning mutual funds. But only a fraction (6%) said they invested in options or futures. Investments currently owned (C 80% 70% 60% 50% 40% 30% 20% 10% 0% 67% 36% 61% Stocks Bonds Mutual funds 16% 6% Annuities Options or futures 11% Other 3

4 INVESTOR CONFIDENCE & INVESTMENT LITERACY SELF-PERCEPTION Respondents were moderately bullish on the market in April 2003, with 50% upward movement over a six-month horizon, and only 18% expecting decline. In the next six months, I expect the stock market to (C17) Stay the same 34% Fall 16% Rise 50% While a majority (54%) said they expect to maintain their current investment levels in the next six months, well over a third (41%) said they will increase their investments. Over the next six months, I expect to (C16 Maintain your investments a their current level 54% Take money ou of your investments Put more mone into investment (not including regular contributions to retirement accounts through payroll 41% Over two-thirds of respondents (69%) described themselves as being somewhat knowledgeable about investing, and the vast majority (81%) said that their overall level of knowledge had increased over the past three years. Self-reported knowledge level (B1 Recent increase in knowledge (B2 Very knowledgeable 12% Not at all knowledgeable 19% No 19% Somewhat knowledgeable 69% Yes 81% 4

5 Almost all (97%) said it was important to increase their investment knowledge, and nearly half (44%) called it very important. Importance of increasing knowledge (B4) Not at all important 3% Very important 44% Somewhat important 53% In fact, almost half (4) said they could have avoided a negative experience in the market had they known more about investing at the time. Could have avoided a negative investment experience (B3) Yes 4 No 5

6 INVESTOR LITERACY 10 Basic Market Knowledge Questions Only 3 of investors answered at least seven out of the ten of NASD s Basic Market Knowledge questions correctly. 1) A large majority of investors (79%) understood the concept of a stock. You have len money to the company 10% If you buy a company's stock (B7) The company will return your original investment to you with interest You are liable for the company s debts 1% You own a part o the company 79% 2) Somewhat fewer (71%) understood the concept of a bond. You can vote on shareholder resolutions 17% If you buy a company's bond (B8) You own a part o the company You are liable for the company s debts 2% You have len money to the company 71% 3) Most investors (84%) identified U.S. Treasury Bonds as the safest. Which type of bond is the safest? (B9) Municipal bond Corporate bond 1% Don t know/no 10% U.S. Treasury bond 84% 6

7 4) Only about half (51%) knew the definition of a junk bond. Which of the following is the best definition for a junk bond? (B11) 26% A bond that is no regulated 14% A bond that has defaulted 3% A bond that has declined dramatically in value 6% A bond rated as below investmentgrade by rating agencies 51% 5) And only 40% understood the relationship between bond prices and interest rates. In general, if interest rates go down, bond prices (B10) 23% Go down 2 Are not affected 12% Go up 40% 6) Only a fifth of investors (21%) correctly identified the definition of a no load mutual fund, and over a third (37%) would not venture to guess. A "no load" mutual fund is one that (B12) 37% Carries no fees 32% Has no limits on the period of time in which it can be bought and sold 6% Does not contain high-risk securities 4% Carries no sales charges 21% 7

8 7) A strong majority (72%) knew that riskier investments yield higher returns over time than less risky investments. True or false? In general, investments that are riskie tend to provide higher returns over time than investments with less risk. (B13) False 19% 9% True 72% 8) About half of investors (51%) knew that stocks have yielded higher average returns than other investments. Over the last 20 years in the US, the best average returns have been generated by (B15) Precious metals 2% 22% Money market accounts 10% CDs 6% Bonds 9% Stocks 51% 9) But fewer than half (40%) selected 10% as a reasonable average annual return on a broadly diversified stock mutual fund over the long term. What is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run? (B14) Twenty percent 4% Fifteen percent 1 Twenty-five percent 2% Five percent 1 24% Ten percent 40% 8

9 10) Finally, 38% of investors knew that they are not ind against losses in the stock market; but 62% believed they were or did not know. Which of the following organizations ins you against your losses in the stock market? (B16) 4 40% 3 30% 2 20% 1 10% 0% 38% None of the above 22% 16% 14% SEC (Securities and Exchange Commission) FDIC (Federal Deposit Insurance Corporation) 12% SIPC (Securities Investor Protection Corporation) 4% NASD (National Association of Securities Dealers) Summary of investor responses to Basic Market Knowledge questions Basic Market Knowledge questions % Answered Correctly Relative safety of different kinds of bonds 84% Definition of a stock 79% Relationship between risk and return 72% Definition of a bond 70% Definition of a junk bond 51% Type of investment yielding best average return 51% Reasonable long-term annual return from mutual fund 40% Relationship between bond prices and interest rates 39% Lack of insurance against stock market losses 38% Definition of a no load mutual fund 21% 9

10 INVESTMENT LITERACY SEGMENTATION While 3 of investors answered at least seven out of the ten of Basic Market Knowledge questions correctly, investment literacy varied significantly among specific sub-groups: Higher knowledge than the norm % who answered 7 of 10 questions correctly Lower knowledge than the norm % who answered 7 of 10 questions correctly Older (50+) 4 Younger (21-29) 24% Men 46% Women 2 Higher income ($100K+) 51% Lower income (<$50K) 23% Primary decision-makers 42% Shared decisionmakers 2 4+ transactions in past year 54% No transactions in past year Own mutual funds 46% Own no mutual funds Own taxable accounts or taxable and tax-deferred accounts 48% Own tax-deferred accounts only 22% 17% 24% 10