Another 25 percent underestimated how much they knew about personal finances, reporting low levels of confidence but scoring high on the quiz. About half of those surveyed received scores that pretty much matched what they said they knew. (Want to see how much you know about investing? Scroll down to try your hand at the quiz.)
People were more likely to understand terms like “fixed income” but were confused by the definition of terms such as “basis points” and “managed accounts.”
The mismatch says something about the learning process, according to Warren Cormier, chief behavioral officer for the National Association of Retirement Plan Participants. As people learn more, they begin to realize how much more they have yet to learn, he says, and their confidence takes a blow.
In the broader world of investing, overconfidence can be dangerous. But within the confines of a retirement savings plan, where investing choices are limited and fiduciary rules often prohibit use of the riskiest options, it might not be so bad, Cormier says.
That’s because people who are confident — or even overconfident — in their finances are more likely to take action, he says. They might decide to save more than they have been or they might take more risk with their portfolios, giving their money more room to grow over time, he argues.
On the other hand, people who know more about investing but don’t trust their instincts might have the tendency to be more reserved with their savings, Cormier says. That limits their losses, but also restricts how much their money can grow. “They’re kind of frozen in uncertainty and make fewer decisions,” he says.
It’s not always that simple, of course. Some people might take risks with their savings that make them too vulnerable or they might move money around at the wrong time.
But the study also found another way that confidence pays. The people who believed they could one day save enough money to retire also saved a bigger share of their income than people who weren’t as confident, the report found. Those people were less likely to feel like their efforts to save were futile, Cormier says, and therefore saved more.
The study focused at what retirement plan record keepers, such as Charles Schwab, Vanguard and Fidelity, could do to boost financial literacy and improve people’s understanding of retirement savings. Bank of America Merrill Lynch scored highest on the index of financial literacy and trust, followed by Fidelity and Vanguard.
How much do you know about investing? Test your knowledge with this quiz from the National Association of Retirement Plan Participants: