The Wall Street Journal has an article in the Personal Finance section with the headline: True or False: Many Americans Don’t Understand the Basics of Investing . They give two examples of questions that have many people confused:
Consider that while 67% of respondents to a 2009 survey rated their own overall financial knowledge as “high,” only 53% answered this question correctly: “True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
Only 6% got the answer wrong, choosing “True.” But fully 40% said they didn’t know the answer, and 1% declined to answer.
Another question on Finra’s survey: “If interest rates rise, what will typically happen to bond prices?” The possible answers were: rise, fall, stay the same, or there is no relationship.
Just 28% answered correctly (they will fall). More than one-third of respondents—37%—said they didn’t know; 18% said bond prices would rise if interest rates rise; 10% said there is no relationship between bond prices and interest rates; 5% said bond prices would stay the same; and a reluctant 2% said they preferred not to answer.
Financial professionals are not only supposed to know the answers to basic questions like this, and apply them to your particular situation, but they should also provide you with an education about basic financial concepts like diversification and how interest rates affect bond prices. An educated investor may not be able to predict the future, but should be able to make informed judgments about the effect of economic policy on his or her portfolio .