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Comments by YACCS
Monday, February 28, 2005

Most people can't even handle their own stocks

Like this Iraqi car, your social security money will go up in smoke if Bush wins

Misinformed Investors

In late 2003, the NASD surveyed 1,086 people who were known to have made at least one investment in that year. The survey was sent to investors whose portfolios ranged from as little as $10,000 up to a maximum of $500,000. Over two-thirds of the survey respondents (69%) described themselves as being at least “somewhat knowledgeable” about investing. Only 12% admitted to being “not at all knowledgeable.” With that in mind, let’s look at some of the responses.

First, there was considerable misunderstanding as to the basic types of investments. For example, 60% of respondents said they own stocks, yet 21% of survey respondents did not understand the concept of a stock. While most understood that owning a stock means that you own a piece of the company, here was the real shocker: Almost half of the respondents believed that stocks are insured against losses!

To be fair, the question was somewhat “loaded” in that the survey listed several organizations (SIPC, FDIC, etc.) and asked, “Which of the following organizations insures you against your losses in the stock market?” Again, nearly 50% of the survey respondents thought that their stock market losses were insured! The correct answer was NONE of the above. No agency insures against stock market losses.

Likewise, 70% of the survey respondents did not understand that when one buys stock on “margin,” he or she can lose ALL of the investment, even if the value of the shares does not go to zero. When investors buy stocks on margin, using loans from their brokerage firm and putting up the securities they buy as collateral, they can potentially lose all the money they paid for the stocks, but also the amount they borrowed.

Regarding mutual funds, the results weren’t any better. While 60% of respondents said they owned mutual funds, 80% did not know the definition of a “no load” mutual fund. The survey also suggested that many investors do not know the difference between loads (sales charges) and normal operating expenses of mutual funds.

So, how about bonds? 29% of respondents did not understand the concept of a bond. 60% did not understand that if interest rates rise, most bonds lose value. Only about half of the respondents knew the definition of a “junk bond.” Almost 70% of the survey respondents did not understand why municipal bonds offer lower pre-tax yields.

And these are educated, relatively well off investors.

Extrapolate that to social security.

posted by Steve @ 10:33:00 AM

10:33:00 AM

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