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FOR IMMEDIATE RELEASE
Contact:
Chris Doyle
American Century Investments
816-340-4638
816-340-7033 (media line)
KANSAS CITY, Mo., September 15, 2005 – On the eve of Achieve Financial Independence
Week™, a new study suggests that improved knowledge of basic investment concepts will
be key as individuals attempt to exercise greater control over their financial affairs.
According to American Century Investments’ On Plan I.Q. Quiz, a 10-question test
taken by more than 800 investors, knowledge of some of the most basic investment concepts
is poor. Only 2 percent of the investors surveyed answered all 10 questions correctly.
On average, participants selected about half of the correct responses on the multiple-choice
test, which was given to individuals who have investments outside of a company retirement plan.
"While the trend over the last few decades has been for Americans to assume more
‘ownership’ of their financial futures, many still don’t grasp some of the most essential
investment concepts, leaving them ill-equipped to achieve their financial goals," said
Doug Lockwood, vice president of Investor Guidance at American Century. "Financial
empowerment must begin with quality financial education and guidance."
Challenging Concepts: Rebalancing, Asset Allocation & Dollar Cost
According to the survey results, portfolio rebalancing is the concept that confuses investors
most. When presented with three true statements about rebalancing, only 13 percent selected the
correct response: "all of the above." While the largest proportion of respondents
(37 percent) recognized that rebalancing returns the portfolio back "to its ideal asset
allocation mix," they failed to grasp other aspects. They appeared most confused by the
notion that rebalancing often entails selling some of the investments that have performed best
and buying more of those that have lagged. In fact, only 2 percent of respondents selected
this answer.
Similar to the question about rebalancing, respondents were provided with three true statements
about asset allocation, yet only 26 percent selected "all of the above" as the correct
answer. Most concerning is that an equal percentage of respondents (26 percent) selected
"don’t know" as their primary response to the asset allocation question. Approximately
a third of respondents (33 percent) recognized asset allocation as "a strategy where
investments are divided among different asset classes such as stocks, bonds and cash."
But, they were less familiar with studies suggesting a portfolio’s "investment returns over
time are based mostly on its asset allocation," an answer selected by only 2 percent of
respondents.
The test participants also struggled with definitions of other common investment terms and
concepts. For example, more than half (56 percent) could not correctly identify the definition
of dollar cost averaging as a method that involves "consistently buying equal dollar amounts
of a security at regular intervals regardless of price." Interestingly, a large block of
respondents (41 percent) said they simply didn’t know.
Also, only 42 percent of investors were able to accurately define an actively managed mutual
fund as a "portfolio that seeks to produce investment returns that are better than a specific
market benchmark." Once again 41 percent chose "don’t know" as their primary
response when presented with four definitions.
Diversification, Tax-deferral & the Power of Compounding Understood
Better
Fortunately, investors scored better on other questions related to basic investment practices.
For example, 71 percent understood that a &quo;well-diversified portfolio will experience less
volatility." Also, 80 percent understood that tax-deferred means that "taxes are paid
at some point in the future." Only 1 percent of respondents confused tax-free investing
with tax-deferred investing, an encouraging finding.
Also, nearly three-quarters (73 percent) correctly identified the best reason for getting an
early start on a long-term investment plan as "the earlier you start, the more time your
investments have to work in your favor with compounding." A follow-up question
specifically addressing the "power of compounding" was correctly answered by 85
percent of respondents, the largest percentage of correct responses on a single question.
Other planning-oriented questions also garnered a large percentage of correct responses.
For example, nearly three-quarters (73 percent) understood that defining your investment time
horizon, determining how much money you’ll need to meet your financial goals, and determining
your risk tolerance are three key considerations when developing a long-term investment plan.
Investors Rank Their Knowledge
Respondents’ self-assessment of their investment knowledge is mixed. The largest portion of
participants (31 percent) rate themselves a 3 (on a 5-point scale where a 5 is
‘very knowledgeable’) when asked about their knowledge of basic investment principles. A
combined 30 percent rank themselves a 1 or 2, while 38 percent ranked their knowledge 4 or 5.
Specific to the current political debate about Social Security reform, investors don’t expect
this entitlement program to be a significant source of retirement income. Nearly half of the
investors polled (47 percent) believe their "own savings and investments" will be
their largest source of income after they retire. Only 13 percent report that Social Security
will provide the largest portion of retirement income.
"This suggests that many investors are resigned to the possibility that Social Security
– in either its current model or a new form featuring private accounts – probably won’t meet
their future retirement income needs, thus requiring them to take more control of their
individual finances," Lockwood said. While investors seemed to do well on test
questions about the benefits of establishing long-term savings plans, approximately a third
indicated their current plans are lacking. Eighteen percent said they "have a plan that
needs substantial work," while 12 percent indicated they have "no plan
whatsoever."
"This is clearly a case of investors knowing what they should be doing but not acting on
it," said Lockwood. "It’s like diet and exercise. We know what must be done to
stay healthy but it’s hard to get started and remain disciplined."
This also was true about portfolio "diversification." While more than two-thirds
of investors correctly answered the test question about the benefits of a well-diversified
portfolio, 27 percent of respondents indicated their portfolios were not "diversified
enough." Another 19 percent said they didn’t know about their portfolios’ level of
diversification. The reasons most commonly given for not diversifying include: don’
t have enough money (39 percent); haven’t given it much thought (21 percent); and, don’t
understand how to do it (13 percent).
Regardless of their investing knowledge and the extent to which they take the appropriate steps
to establish a long-term savings plan, investors are about evenly split between those who are
confident they’ll reach their goals and those who are not. Forty-eight percent of investors
rated themselves at a 4 or 5 confidence level (where a 5 is ‘very confident’) when asked about
achieving long-term investment goals. Similarly, 47 percent gave themselves a rating of 1, 2
or 3, with the 3 rating representing 30 percent of the responses.
"The results of the On Plan I.Q. Quiz, coupled with the attitudinal research and
self assessment, indicate significant ambivalence by investors about their understanding of
investment basics and ability to apply these concepts to their personal financial situation,
" said Lockwood. "If policymakers want to accelerate the expansion of an empowered
‘ownership class,’ the first priority should be improved financial education and
assistance."
Survey Background
The results of the American Century On Plan I.Q. Quiz and self-assessment research were
drawn from interviews over the Internet with 807 individuals who have investments outside their
company’s retirement plan in: individual stocks or stock mutual funds, individual bonds or bond
mutual funds, and other mutual funds such as money market mutual funds. The survey participants
were members of Harris Interactive’s online panel. Harris Interactive handled data collection
and data weighting functions. The results have a margin of error of +/- 3.6% at a 95% confidence
level.
About American Century Investments
American Century is a leading investment manager with nearly fifty years of experience helping
investors achieve their financial goals. Based in Kansas City, Mo., the company manages
approximately $100 billion in assets through separate accounts, commingled trusts,
subadvisory accounts and mutual funds. James E. Stowers Jr. founded the company in 1958.
His son, James E. Stowers III, is chairman and William M. Lyons is president and chief executive
officer. For the past six years, American Century, which employs approximately 1,800 people,
has been selected as one of FORTUNE Magazine’s 100 Best Companies to Work for. For more
information about the company, visit
www.americancentury.com.
On Plan I.Q. Quiz
Summary
Correct Answer = a
1. Which of the following is true about "diversification"?
a.) A well diversified portfolio will experience less volatility
b.) A portfolio comprised of four large-cap growth mutual funds at four different fund companies is well diversified
c.) Diversification guarantees an investor will make money
d.) All of the above
e.) None of the above
2. Dollar cost averaging is an investment method that involves consistently buying…
a.) Equal dollar amount of a security at regular intervals regardless of price
b.) Shares of a security when it reaches its average price
c.) Shares of a security when they cost a dollar per share
d.) Equal dollar amounts of a security when it reaches its lowest price for the year
e.) Don’t know
3. Which of the following is true about "asset allocation"?
a.) Asset allocation is a strategy where investments are divided among different asset classes such as stock, bonds, and cash
b.) According to academic studies, a portfolio’s investment returns over time are based mostly on its asset allocation
c.) Asset allocation lowers a portfolio’s risk because losses in one type of investment are offset by gains in others
d.) All of the above
e.) Don’t know
4. Generally speaking, which of the following best describes an "actively managed" mutual fund?
a.) A portfolio that mirrors the security holdings and weightings of a benchmark index
b.) A portfolio that consists of a large representative sample of the securities in a target index
c.) A portfolio that seeks to produce investment returns that are better than a specific market benchmark
d.) A portfolio that buys and holds all of the securities in a specific market benchmark
e.) Don’t know
5. Which of the following is often cited by investment experts as the best reason to start a long-term investment plan as early as possible?
a.) Younger adults are able to take advantage of special tax breaks
b.) The earlier you start the more time your investments have to work in your favor with compounding
c.) Early investing allows you to tap retirement funds before you retire without incurring early withdrawal penalties
d.) All of the above
e.) Don’t know
6. Federal tax-free earnings are the primary benefit of which type of retirement savings account?
a.) Traditional IRA
b.) Roth IRA
c.) 401(k) Plan
d.) 403(b) Plan
e.) Don’t know
7. Which of the following is true about “tax-deferred” investing?
a.) Tax-deferred investments are only beneficial to investors in lower tax brackets
b.) Tax-free investing and tax-deferred investing are the same thing
c.) Tax-deferred means that taxes are paid at some point in the future
d.) All of the above
e.) Don’t know
8. Which of the following is true about portfolio “rebalancing”?
a.) Rebalancing adjusts a portfolio to return it to its ideal asset allocation mix
b.) Rebalancing is needed when the performance of the asset classes in the portfolio differ a great deal
c.) To rebalance, an investor sells some of the investments that have performed better and buys more of the investments that have performed worse
d.) All of the above
e.) Don’t know
9. Which of the following is a key to developing a long-term investment plan?
a.) Deciding how much time you have to meet your financial goals
b.) Deciding how much money you need to meet your financial goals
c.) Deciding how much risk you are willing to take in your investments
d.) All of the above
e.) Don’t know
10. The power of “compounding” is…
a.) Withdrawing earnings from investments instead of reinvesting them
b.) A short-term investment strategy
c.) Less important for younger investors
d.) Earning money on what you have already earned
e.) Don’t know
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71%
5%
2%
12%
10%
44%
6%
1%
7%
41%
33%
2%
13%
26%
26%
6%
8%
42%
3%
41%
1%
73%
2%
16%
7%
14%
39%
28%
2%
16%
1%
1%
80%
6%
13%
37%
13%
2%
13%
35%
4%
10%
8%
73%
6%
2%
2%
<1%
85%
11%
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Self Assessment/Attitudinal Study Highlights
- How would you describe your knowledge of basic investment principles? Would you say you
are…
(1 to 5 scale where 1 is ‘Not at all knowledgeable’ and 5 is ‘very knowledgeable’)
| 1 |
8% |
| 2 |
22% |
| 3 |
31% |
| 4 |
27% |
| 5 |
11% |
| Don't know |
1% |
The largest portion of respondents (31 percent) rate themselves a 3 (on a 5-point scale where
a 5 is ‘very knowledgeable’) when asked about their knowledge of basic investment principles.
A combined 30 percent rank themselves a 1 or 2, while 38 percent ranked their knowledge 4 or 5.
- Which of the following sources do you believe will provide the largest portion of your income
after you retire?
| Personal savings & investments |
47% |
| Employer retirement plan |
30% |
| Social Security |
13% |
| Paycheck from working in retirement |
3% |
| Inheritance |
3% |
| Some other source |
1% |
| Don't know |
1% |
Most investors don’t expect Social Security to be a primary source of retirement
income. Only 13% of respondents say it will be their “largest” income source.
- Do you believe your portfolio is diversified enough?
| Yes |
54% |
| No |
27% |
| Don't know |
19% |
While more than half of investors (54%) say their portfolios are “diversified enough,”
a startling 46% said they weren’t diversified or didn’t know. This is interesting given
the fact that 71% of the On Plan I.Q. Quiz takers correctly answered the question
about the benefits of diversification.
- Reasons for not diversifying…(all who answered ‘No’ or ‘Don’t Know’)
| Don’t have enough money |
39% |
| Haven’t given it much thought |
21% |
| Don’t understand how to do it |
13% |
| Don’t have time to do it |
10% |
| It’s too hard to do |
1% |
| Don’t know |
15% |
The reasons most commonly given for not diversifying include not having enough money
(39%), lack of consideration (21%) and lack of understanding (13%).
- How confident are you that you will achieve your savings and investments goals?
(1 to 5 scale where 1 is ‘Not at all confident’ and 5 is ‘very confident’)
| 1 |
4% |
| 2 |
13% |
| 3 |
30% |
| 4 |
39% |
| 5 |
18% |
| Don't know |
5% |
Investors are evenly split between those who are confident they’ll reach their goals and
those who are not. Forty-eight percent of investors rated themselves at a 4- or 5-
‘high confidence’ level, while 47 percent rated themselves at a 1, 2 or 3 level, with the
3 rating representing 30 percent of responses.
- Which of the following best describes your current plan to achieve your long-term savings and
investment goals?
| I have a well thought out plan |
26% |
| I have a basic plan that could use some fine tuning |
42% |
| I have a plan that needs substantial work |
18% |
| I have no plan whatsoever |
12% |
| Don’t know |
3% |
While two-thirds of investors believe their long-term saving and investment plans are in
adequate shape, 33 percent have plans that are clearly lacking.
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