Christmas comes once a year, but a significant number of adult Americans believe the investing Santa Claus shows up year-round. One-third of people who put hard-earned money into mutual funds think they pay no fees or expenses. The findings come from the “Investors in the United States: A Report of National Financial Capability Study” commissioned by the Finra Foundation. Twenty or 30 years ago, it was understandable, but nowadays, it is willful ignorance. Granted, the financial services industry does a masterful job of hiding costs, but there’s no free lunch, full stop. Astonishingly, a majority (60%) who discuss finances with a professional say they pay nothing. Like Lady Madonna thought the money must be heaven sent.


To improve financial literacy the Financial Industry Regulatory Authority (Finra) kicked off the Finra Foundation in 2003. Finra collects annual assessments from firms like mine. About the time I sent my check, electronically, the Finra Foundation released its study based on data collected in 2018 following up from a similar 2015 paper. It looks like they have a tough row to hoe.


In addition to a lack of understanding about fees, Americans have scant knowledge of fundamental investing principals. The Finra Foundation didn’t pull random people off the street; instead, they choose 2,000 individuals who owned investments outside their retirement plans. Over one-third failed to answer five of 10 questions correctly. I am not a pilot, but the term “flying blind” comes to mind.


Almost half believed an investment’s past performance is a good indicator of future results. While only 30% realized the main advantage of index funds over actively managed funds is lower fees and expenses. Let me interject that few actively managed funds consistently outperform index funds and ETFs. If you don’t believe me take it from Noble Prize winner Gene Fama who, along with Ken French, wrote, “the high costs of active management show up intact as lower returns to investors” (Journal of Finance, 2009).


People who invest in cryptocurrency, along with those who borrow money to buy stock (margin purchases), believe they can outperform the market. The only way to beat the market is to take additional risks. The majority of those in the study realized risk and return are linked. Borrowing money increases your risk. Investing in Bitcoin or one of its cousins is an excellent way to make a small fortune if you start with a large one.


2018 was not a good year for the U.S. stock market, but half (51%) of the investors surveyed thought U.S securities were suitable long-term investments. In the 2015 study, 44% felt similarly. In both studies, almost one-third believed U.S. financial markets were unfair to all investors. Fair or not markets are efficient, far more efficient than any market-beating strategies pitched at a free dinner or by an investment professional. Make sure your portfolio is appropriate for your goals, time horizon, and risk tolerance.


You can’t always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.