Investors Lack An Understanding Of The Rudiments Of Investing

I read the following at Vanguard's website today:

"The average score on the 2002 Vanguard/MONEY Investor Literacy Test was 40%, a modest increase over the 37% achieved on a similar test conducted by Vanguard in 2000. While improving, the test results indicate that many investors lack an understanding of the rudiments of investing, particularly those individuals who have recently discovered the benefits of mutual funds. It also underscores the need for continued education efforts by the fund industry."

"In particular, many investors find bonds baffling. Nearly 70% of the respondents, for example, didn't understand the inverse relationship between bond prices and interest rates. In addition, some 60% of the respondents didn't understand bond maturity, and 58% didn't know that income from municipal bonds was federally tax-exempt. Costs also proved confounding to investors. Some 75% of the respondents couldn't accurately define expense ratio, and 64% didn't understand the impact of expenses on fund returns. Nearly 70% of the respondents couldn't correctly identify the charge to purchase fund shares as a 'sales load.'"

I was struck by the line, "... many investors lack an understanding of the rudiments of investing." What is that, some kind of Zen koan? If I ponder that one long enough will I gain sudden intuitive enlightenment?

The fact of the matter is that the entire fund industry is dependent upon ignorant people giving them money. Active money management is a sham that can only exist in a world where nearly two-thirds of investors don't "understand the impact of expenses on fund returns." I try not to be cynical about these things, but after reading those survey results I can't help but despair over how dumb people can be about their money.

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