Trial lawyers are taught to avoid asking questions they do not know the answer to.

We ask questions that investors may not know the answer to.

Sometimes our research provides surprising results, often in the manner investor attitudes have changed over time. But one element of our research that is almost always surprising is the percentage of investors who don’t know key details of their portfolio.

Because it is the correct procedure when conducting research, we often include “I don’t know" as a response option for the investors involved in our research. And investors often reply “I don’t know" to questions they probably should know the answer to.

The suggestion that “what you don’t know won’t hurt you” is not only inappropriate when considering investment decisions, it is probably not even true. Investors should know details about their portfolio makeup.

Advisors really need to know what their clients do not know or understand about their investments and advisors probably should, at the very least, find out if their clients WANT to know what they don’t know about the investments they have.

In our study Asset Allocations, Portfolios and Primary Providers, investors were asked to describe by percentage the investment breakdown of their retirement accounts. Among all investors with a net worth between $100,000 and $25 million (not including the value of their primary residence), 20 percent, one-fifth of the retirement assets of all investors, were listed as “unknown”, as in the Investor did not know where all of their investable assets were placed.

And keep in mind that these are answers provided by the investors. They are admitting they do not know what kind of products a significant portion of their investments are invested in. While it is true that percentage drops as investor knowledge rises, it’s still a sizable average of unknown investment detail.

Shouldn’t investors know, even if they don’t fully understand, or don’t worry about what they don’t know?

There are dozens of examples in our research findings of investor disengagement in investing matters, and perhaps that is by choice. In our study Evolving Investor Attitudes and Behaviors, 60 percent of Ultra High Net Worth investors with a net worth between $5 million and $25 million said they liked to be involved in the day-to-day management of their investment accounts, which means 40 percent of those wealthy investors DO NOT want to be involved.

But that does not mean they don’t need to know what is going on.

 

In the same study, we asked investors whether they understand the day-to-day movement of the stock market, and asked them to rate their understanding on a 100-point scale from very confusing (0) to very understandable (100). While the overall rating was 47.84, just slightly on the side of confusing, for investors who admit to being not very knowledgeable about investing and finance, the average response was 39.87, which is very much on the side of confusing.

Investors who have investments in equities should probably have some understanding of how their value rises and falls, even if it is a basic one. 

There are probably investors who would balk at being informed of details they do not care to know. But there may be investors who don’t know material details of their portfolio because they are afraid or embarrassed to ask.

Advisors need to make investors understand that what they don’t know might hurt them from a financial standpoint.          

 

©2019 Spectrem Group