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What is your level of financial literacy? (Igor Smichkov/iStockphoto)
What is your level of financial literacy? (Igor Smichkov/iStockphoto)

Knowledge

Are you a ‘savvy’ investor? Take this quiz to find out Add to ...

The ancient Greek aphorism “know thyself” was conceived millennia before 21-century investors grappled with financial plans, risk-tolerance levels and mutual fund fees.

But, it’s a vital tenet when it comes to investing.

So when a random sampling of 1,000 Canadians was surveyed by BMO Nesbitt Burns recently, for its Savviest Investor Index, it seemed like good news that 84 per cent reported they generally felt confident that they’re managing their investments well.

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The self-styled “savviest” investors were from British Columbia, with a score of 92 on the index. That indicated a high number of people who said they were aware of their investment profile, said they paid close attention to market news, and felt knowledgeable about things such as guaranteed investment certificates, mutual funds, interest rates and credit ratings.

Canadians in Atlantic Canada scored the lowest, at 74.

“The good news is that people are paying attention to their wealth and their investments and their financial planning needs,” said Bill Brown, senior vice-president and managing director, national sales manager, BMO Nesbitt Burns. “But it’s a good news, bad news story: 50 per cent of Canadians do have a financial plan, which means 50 per cent don’t.”

Another bit of bad news is that because the survey asked participants to indicate how they felt about their investments and how much they thought they knew on certain topics, the numbers may not be as positive as they seem.

Mr. Brown acknowledged that “people don’t know what they don’t know,” and that the study seemed to have a disconnect in terms of people not knowing their investor risk profile or not having a financial plan, yet still feeling confident about their financial situation.

Tom Hamza, president of the Investor Education Fund, a non-profit organization established by the Ontario Securities Commission to help people make better financial and investing decisions, agreed that the study’s findings could be misleading.

“The situation is much more dire than what this survey seems to indicate,” Mr. Hamza said. “There is a tremendous shortfall in terms of not just knowledge but the ability to translate that knowledge into action.”

Mr. Hamza based his assessment on his organization’s Benchmarking Financial Knowledge surveys. The most recent survey, done in 2012, asked questions related to financial planning, saving, investing and borrowing, and yielded a pass rate of only 54 per cent.

The consequences of such a low level of financial literacy are not just personal, Mr. Hamza said. If enough people aren’t properly planning for their futures – saving and investing for a dignified retirement, a possible legacy for their children – it will create a “social crisis” on a broad scale.

So how can we ensure that we are truly savvy investors, not just think that we are? Self awareness is big on Mr. Brown’s list: knowing our investor profile, how much risk we can tolerate, how much we’ve saved, how much we need to live on now and in the future.

He believes people should also spend the time to educate themselves by reading books, newspapers, magazines and online commentary about personal finance and the markets. After all, he said, “Next to one’s health and family, I think their wealth is extremely important and should be taken very seriously.”

Both Mr. Hamza and Mr. Brown agree that using a financial adviser can be a great help to most investors.

“We do that in all other fields, from medicine to plumbing,” Mr. Hamza said.

But he stressed that investors need to know how to work with these professionals, how to evaluate them, what to expect from them and when to ask for more.

He also stressed that an adviser can’t do it all and can’t work magic.

“We have to be able to do the work required that they can’t do for us: having our financial houses in order in the first place.”

Here’s the quiz: How financially literate are you?

These questions were taken from the Investment Education Fund’s 2012 Benchmarking Financial Knowledge study.

Questions:

1) An investment pays 5-per-cent annual interest. If you put in $1,000 today, how much money will you have two years from now? Is it most likely to be?

a) $1,100 or less

b) More than $1,100 but less than $1,200

c) More than $1,200 but less than $1,300

d) Don’t know

2) If you earn $1,000 on the money in your RRSP, when will this income be taxable?

a) In the year that you earned the $1,000

b) When you take the money out of your RRSP

c) When you move the money from an RRSP to a RRIF

d) The earnings are never taxed

3) If you know you will need all of your savings to pay for expenses two years from now, stocks are a safe place to park your money until you need it.

(On a scale of 1 to 5, where 1 means strongly disagree and 5 means strongly agree.)

4) Over the next 20 years, the stock market will probably earn more money than a savings account.

(On a scale of 1 to 5, where 1 means strongly disagree and 5 means strongly agree.)

5) Over an average 20-year period, what annual rate (what per cent a year) would you reasonably expect to earn by owning a typical basket of Canadian stocks?

a) 2-4 per cent

b) 6-8 per cent

c) 13-15 per cent

d) Don’t know

Answers:

1) b. Correctly answered by 39 per cent of respondents.

2) b. Correctly answered by 76 per cent of respondents.

3) 1. Correctly answered by 68 per cent of respondents.

4) 5. Correctly answered by 53 per cent of respondents.

5) b. Correctly answered by 49 per cent of respondents.

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