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Don't Trust American Investors
Rob WalkerPosted Wednesday, July 12, 2000, at 2:10 PM ET
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.
Related on MSN
What do you really know about funds? MoneyCentral's Mutual Fund Quiz will help you spot potentially costly gaps in your knowledge.
Reader Response from The Fray:
If the citizens of this country want the government to underwrite their risk, then the government must establish guidelines on how that occurs. America, have the wherewithal to sink or swim based on your individual savvy or allow the government to underwrite your risk according to the government's rules. Sure, as citizens, we must participate in the establishment of the rules. Based on election participation results, less than 50% of us are willing to participate. Social Security is an insurance program funded by taxes. Do not confuse program design with funding methodology. We have no right to reflect on the intent of our country's founders. I believe they would blast us for being the biggest whiners. If the founders thought the way we think, this country would never have been established. We want a sure thing. They were willing to take risks, including fighting one of the most powerful nations of the time, Great Britain.
--Richard F
(To reply, click
here.)
The sampling used by the survey virtually guaranteed the result. A primary reason for investing in mutual funds, rather than investing directly in the underlying securities or bonds, is an awareness by the investor that he lacks the knowledge to make good investment decisions on his own. The 37% score merely reaffirms that these investors are wise to rely upon an expert. A much more meaningful survey (which I suspect would provide a very different result) would be of people who invest directly in bonds and securities.
--Eric Fleischauer
(To reply, click
here.)
To Eric Fleischauer: Academic studies have shown that people who directly pick stocks do even worse than professionally managed funds. Therefore, you are right, the results would have been different if the sample had been wider, but not in the way you predict. Individual investors who pick their own stocks combine two deadly traits: 1) the well-documented inability of actively managed investments to consistently beat the market, and 2) their own self-delusion that they can.
--H-Bomb
(To reply, click
here.)
I got 18 out of 20 questions correct. I guess I'm a smart guy but my returns don't bear that out. My mom, who knows nothing about investing, has had incredible returns and is a millionaire because of the market return for the last three years. Meanwhile I sit and stew over my misfortune of less than 100% returns.
--Daniel
(To reply, click
here.)
What else can Americans not be trusted with? I see a lot of people making stupid career decisions. I believe that the Federal Government should, therefore, look into a job-placement program, possibly modeled after the highly successful examples of Cuba and former USSR. Also, there is way too much freedom of choice regarding our shopping for food, clothes, SUV's, etc. Possibly the Feds could look at standardizing this ala China, so that we don't make stupid choices with what we eat, drink, wear and drive.
--Steve
(To reply, click
here.)
To Steve: Well, at the risk of increasing your paranoia, the government has been known to help with job training. And if someone chooses the wrong clothes, they aren't going to be destitute in their old age and require state support.
--Suzanne
(To reply, click
here.)
[Notes from The Fray: This line of argument provoked considerable debate and the suggestion "Whatever happened to preventing one daughter from marrying so that she could care for you in your old age" (this has been Fray-tested, and is in fact irony). But your Fray Editor was sorry no-one pursued the question of whether choosing the right or wrong clothes could actually ensure or compromise a prosperous old age...]
(7/14)
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Reader Response from The Fray:
If the citizens of this country want the government to underwrite their risk, then the government must establish guidelines on how that occurs. America, have the wherewithal to sink or swim based on your individual savvy or allow the government to underwrite your risk according to the government's rules. Sure, as citizens, we must participate in the establishment of the rules. Based on election participation results, less than 50% of us are willing to participate. Social Security is an insurance program funded by taxes. Do not confuse program design with funding methodology. We have no right to reflect on the intent of our country's founders. I believe they would blast us for being the biggest whiners. If the founders thought the way we think, this country would never have been established. We want a sure thing. They were willing to take risks, including fighting one of the most powerful nations of the time, Great Britain.
--Richard F
(To reply, click here.)
The sampling used by the survey virtually guaranteed the result. A primary reason for investing in mutual funds, rather than investing directly in the underlying securities or bonds, is an awareness by the investor that he lacks the knowledge to make good investment decisions on his own. The 37% score merely reaffirms that these investors are wise to rely upon an expert. A much more meaningful survey (which I suspect would provide a very different result) would be of people who invest directly in bonds and securities.
--Eric Fleischauer
(To reply, click here.)
To Eric Fleischauer: Academic studies have shown that people who directly pick stocks do even worse than professionally managed funds. Therefore, you are right, the results would have been different if the sample had been wider, but not in the way you predict. Individual investors who pick their own stocks combine two deadly traits: 1) the well-documented inability of actively managed investments to consistently beat the market, and 2) their own self-delusion that they can.
--H-Bomb
(To reply, click here.)
I got 18 out of 20 questions correct. I guess I'm a smart guy but my returns don't bear that out. My mom, who knows nothing about investing, has had incredible returns and is a millionaire because of the market return for the last three years. Meanwhile I sit and stew over my misfortune of less than 100% returns.
--Daniel
(To reply, click here.)
What else can Americans not be trusted with? I see a lot of people making stupid career decisions. I believe that the Federal Government should, therefore, look into a job-placement program, possibly modeled after the highly successful examples of Cuba and former USSR. Also, there is way too much freedom of choice regarding our shopping for food, clothes, SUV's, etc. Possibly the Feds could look at standardizing this ala China, so that we don't make stupid choices with what we eat, drink, wear and drive.
--Steve
(To reply, click here.)
To Steve: Well, at the risk of increasing your paranoia, the government has been known to help with job training. And if someone chooses the wrong clothes, they aren't going to be destitute in their old age and require state support.
--Suzanne
(To reply, click here.)
[Notes from The Fray: This line of argument provoked considerable debate and the suggestion "Whatever happened to preventing one daughter from marrying so that she could care for you in your old age" (this has been Fray-tested, and is in fact irony). But your Fray Editor was sorry no-one pursued the question of whether choosing the right or wrong clothes could actually ensure or compromise a prosperous old age...]
(7/14)