O ne way to estimate the extent of investor illiteracy is to determine what experienced investors know or don't know. The sample comprised only individuals who made their household's investment decisions. Presumably, this was a sample of knowledgeable investors, whose responses should have provided a baseline of investment literacy. The core of the survey was an eight-question test of investor knowledge. But 20 percent said they didn't know, and the remaining 14 percent divided evenly between answering that a blue chip was the stock of a high-tech company or a dollar stock.
Young investors are more ignorant as well as more optimistic.
Almost two-thirds correctly answered stocks. The percentage of correct answers dropped sharply when respondents were asked the relationship between the rise and fall of interest rates and the rise and fall of bond prices. Although the direction of interest rates and the effect on bond prices is frequently reported in business-news pages, only 39 percent of respondents knew that bond prices decline when interest rates rise. Only 42 percent of bondholders gave the right answer. Mutual funds are the entry point into equity investing for most novices.