SEC study finds U.S. retail investors lacking in basic financial literacy

The Securities and Exchange Commission recently published a Dodd-Frank-mandated study of investors’ financial literacy, concluding that U.S. retail investors lack basic financial literacy.

Following the recent financial crisis, U.S. lawmakers reasoned that one of the factors that contributed to the economic collapse was that average investors did not understand stocks, bonds and mutual funds. The SEC asked the Library of Congress to review all quantitative studies on the financial literacy of U.S. retail investors published since 2006, according to Business Insider.

“For example, studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation,” the report said, Business Insider reports. “Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns. Moreover, based on studies cited in the [LOC] report, investors lack critical knowledge about investment fraud.”

To combat the findings, the SEC listed several preliminary strategies, including targeting specific groups, such as young investors, lump sum payout recipients, investment trustees, the military, underserved populations, and the elderly; promoting the importance of checking the background of investment professionals; promoting as the primary federal government resource for investing information; and promoting awareness of the fees and costs of investing.