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Investor knowledge: A study of financial literacy

Investment definition
Investor Education Fund survey shows many Ontarians lack a higher level of knowledge around money and investing

 Download the full report of the findings on financial literacy.


Toronto, ON, 2011 - The Investor Education Fund conducted a survey of 1,000 people. We asked them more than 20 questions that related to investing, borrowing and financial planning. We wanted to gauge their knowledge of key concepts, including:

  • Setting goals
  • Timing of money needs
  • Simple versus compound interest
  • Inflation
  • Economic cycles
  • Investment risk and safety
  • Diversification
  • Dollar cost averaging
  • Fraud prevention.

We also asked them where they went on the Web to learn about investing

Note that the focus of our questions was not to assess basic financial capability. Rather, we wanted to test people for a higher level of knowledge that you might expect from a well-informed citizen. What we found may surprise you.

Key findings

Our survey results overall show that financial literacy in Ontario is low. The average score was 11.5 correct out of 23 questions (50 per cent). If we consider 60 per cent correct as a "passing grade," then only 3 out of 10 Ontarians (29 per cent) would be viewed as passing. A few clear findings emerged from the pattern of correct and incorrect answers:

  1. People need to learn how to apply what they know to real life decisions. Even when people understand a financial or economic principle in theory, applying the principle to a real situation is difficult for them. For instance, we found that in the context of choosing a mortgage, people were not able to apply their knowledge that borrowing for a longer time means you will pay more interest overall.
  2. People need to build their knowledge of investment risks and returns. This is especially true of the prime investing group aged 50-64 and later ages. Seniors need to understand which investments are inconsistent with a capital preservation and income production strategy.
  3. People need to improve their knowledge of financial planning and setting goals. Scores were low in every age group. And, unlike information about investments, people are unaware of what they don’t know about financial planning.
  4. Those under age 35 need to learn about the tax rules for RRSPs. While other groups are aware of the tax implications, this age group is not. Educating this age group about the tax benefits might spur earlier investment or retirement savings.
  5. There are still people who are vulnerable to investment fraud. Even though 9 out of 10 people know the basic signs of a potential fraud, there is still a group at risk. The real difficulty is recognizing the signs in a real life situation.

In a perfect world, we would ask thousands of questions of thousands of people to get a more perfect gauge of investor knowledge. With limited time and resources, a good set of questions that focus on concepts with long-term importance is a reasonable alternative. Here is a sampling of how people scored on some of the specific questions in the survey.

Investing questions
6 out of 10 Average number of people who answered investing questions correctly
9 out of 10 Knew that an investment that claims to guarantee a high return could be a scam
8 out of 10 Knew that most people will pay less income tax if they put money into an RRSP this year
7 out of 10 Knew that stocks were not a safe place to park money you will need in two years
6.5 out of 10 Understood that if one investment looks like it will likely earn more money than another, it also means there is more risk you will lose money
3.5 out of 10 Understood that inflation affects bonds more than it affects stocks

Borrowing questions
7.5 out of 10 Average number of people who answered borrowing questions correctly
9 out of 10 Knew that the longer they borrow money, the more interest they will pay
7.5 out of 10 Knew that a line of credit is a less costly way to borrow than a credit card or a payday loan
5.5 out of 10 Understood that the cost of a 25-year mortgage is higher than a 20-year mortgage

Planning questions
4 out of 10 Average number of people who answered planning questions correctly
8.5 out of 10 Knew that automatic deduction from pay is a good way to make sure of saving money for retirement
6.5 out of 10 Understood that when inflation goes up it hurts their standard of living
3 out of 10 Knew you could start saving while paying off debt
2 out of 10 Understood know how financial priorities change with age

Who knew the most?

  • People with more education and higher incomes answered more questions correctly.
  • Men did slightly better overall than women.
  • Married people performed better than singles.
  • People between the ages of 35 and 49 outperformed any other age group.
  • Internet users scored higher than non-users.

Graph 1

The study also found that people who are investing and saving for retirement tended to know a lot more than people who were not. Non-investors were far less aware of the tax benefits of an RRSP. They also knew little or nothing about stocks. This echoes the results of other studies that show people tend to get informed when they are personally involved and need to make decisions.

Graph 2

Two variables were not related to knowledge: region and mother tongue. Those who speak English as a second language performed just as well as native English speakers. With Ontario divided into seven regions, it is clear that no region does significantly better or worse than any other overall or for knowledge of investments.

Guess who scored highest? People who used during the past six months scored more than 25 per cent higher overall than others. Our website users also scored higher than others on every investment-related question.

About the survey process

The survey was led by The Brondesbury Group, Toronto. The results presented here are drawn from a sample of 1,000 households spread across Ontario. The accurate representation of households from seven regions within Ontario was part of the survey design, as was the balance between male and female respondents. As well, because telephone surveys often under-sample under 30’s, we set a minimum quota for those in the 18-29 age group to provide greater accuracy in responses.

The following charts shows some of the key attributes of those who participated:

Graph 3

With the sample of 1,000 respondents, statistical results will be accurate to +3% some 19 out of 20 times for Ontario as a whole. For smaller groups, like income segments or 10-year age groups, accuracy will be closer to +6% some 19 out of 20 times.

Download the full report of the findings on financial literacy.


Related resources

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RRSP savings calculator