Surprisingly, most Americans showed understanding of diversification, asset allocation and dollar-cost averaging, while flunking basic questions about other financial concepts in a survey for Northwestern Mutual. This discrepancy is consistent with findings in a 2006 study.
Overall, the two studies imply that worries during the economic downturn have not led Americans to learn more about personal finance. For the current data, the independent research firm Mathew Greenwald & Associates, Inc. conducted the online survey of 1,664 Americans ages 25 to 65 this year.
A large majority (88%) could pick out the definition of diversification and 79% correctly answered a question about asset allocation. Fifty-seven percent correctly chose a definition of dollar-cost-averaging.
But on other questions, respondents were largely ignorant. For example, only 35% of respondents knew that the average rate of inflation is closer to 3% than 6% or 9%.
Half of those tested responded incorrectly that bonds offer better protection from inflation than stocks. Only 32% knew that Index funds seek to match the returns of stock or bond benchmarks.
Few respondents showed basic understanding of insurance products. Only 27% knew that permanent life insurance can pay dividends. Nearly half incorrectly thought that term life insurance is more likely to have cash value than permanent life insurance.
Dave Simbro, Northwestern Mutual vice president, suggests that Americans understood the questions about diversification, asset allocation and dollar-cost averaging because those terms are used in company educational materials about 401(k)s.
"But there’s a mismatch between awareness and the ability to implement the concepts," he says. "And there’s a big gap in understanding what life insurance can provide."
The study did find that people want to learn more in order to manage their economic circumstances. When asked to rank the importance of understanding their own personal finances, nearly eight in 10 respondents (79%) gave it a 7 or above on a scale of one ("what I don’t know won’t hurt me") to 10 ("I feel the need to know all I can about my financial situation").
Temma Ehrenfeld writes for Financial Planning magazine, a SourceMedia publication.
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