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How Financially Literate Are You With Investing?

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How Financially Literate Are You Compared to the Average American?

Are You Financially Literate?

If you’ve ever paid attention to any report on financial literacy from around the world, you’ll likely know that the results aren’t exactly awe-inspiring.

For example, according to one global survey, only about 33% of adults are financially literate.

Americans tend to fare better on average, but not as much as you might imagine. In fact, as we showed in our infographic on the Financial Literacy Problem, one ongoing survey actually sees average U.S. performance slowly dropping over time.

It raises the question: what do people actually know about money, investing, and wealth?

Investment Literacy

A recent poll by Lexington Law aimed to get a sense of U.S. financial literacy, with a focus on basic investment knowledge on stocks, bonds, and building a safe portfolio.

Specifically, it asked 4,000 Americans four different multiple choice questions:

  1. What is the safest investment type?
  2. What happens to bond prices when interest rates rise?
  3. What is a bull market?
  4. What happens to your stock if a company goes bankrupt?

If you think you know the answers to even two of these questions, you are off to a good start!

The survey ultimately found that the average score on this test was 48.8% – meaning that Americans get slightly fewer than two questions correct on average.

Cheat Sheet

Question #1: Safest Investment
Based on the options provided on the multiple choice, the correct answer was Treasury Bonds. Roughly 53% of Americans would get this right, if asked.

Question #2: Bond Prices
Only 25% of respondents said that bond prices would decrease if interest rates rise, which is the correct answer. To be fair, this relationship is somewhat counterintuitive.

Question #3: Bull Market
With the current bull market becoming the longest in history this month, this terminology has been all over the news. That said, just 53% of respondents understood a bull market to be a period in which stock prices are expected to rise.

Question #4: Bankruptcy
If you own a stock and the company goes bankrupt, what happens? Interestingly, people fared best on this question, with 64% realizing that the stock becomes “virtually worthless”. It’s worth noting, however, that a 64% success rate is still the grading equivalent of a “D”.

How did you do on this test – are you financially literate about investments? Where did you go wrong?

If you need to brush up on investing knowledge, don’t forget to visit our Wealth 101 project that features easy-to-use infographics about personal finance topics.

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How Small Investments Make a Big Impact Over Time

Compound interest is a powerful force in building wealth. Here’s how it impacts even the most modest portfolio over the long term.

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This bar chart shows the power of compound interest and regular contributions over time.

How Small Investments Make a Big Impact Over Time

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

Time is an investor’s biggest ally, even if they start with just a modest portfolio.

The reason behind this is compounding interest, of course, thanks to its ability to magnify returns as interest earns interest on itself. With a fortune of $159 billion, Warren Buffett largely credits compound interest as a vital ingredient to his success—describing it like a snowball collecting snow as it rolls down a very long hill.

This graphic shows how compound interest can dramatically impact the value of an investor’s portfolio over longer periods of time, based on data from Investor.gov.

Why Compound Interest is a Powerful Force

Below, we show how investing $100 each month, with a 10% annual return starting at the age of 25 can generate outsized returns by simply staying the course:

AgeTotal ContributionsInterestPortfolio Value
25$1,300$10$1,310
30$7,300$2,136$9,436
35$13,300$9,223$22,523
40$19,300$24,299$43,599
45$25,300$52,243$77,543
50$31,300$100,910$132,210
55$37,300$182,952$220,252
60$43,300$318,743$362,043
65$49,300$541,101$590,401
70$55,300$902,872$958,172
75$61,300$1,489,172$1,550,472

Portfolio value is at end of each time period. All time periods are five years except for the first year (Age 25) which includes a $100 initial contribution. Interest is computed annually.

As we can see, the portfolio grows at a relatively slow pace over the first five years.

But as the portfolio continues to grow, the interest earned begins to exceed the contributions in under 15 years. That’s because interest is earned not only on the total contributions but on the accumulated interest itself. So by the age of 40, the total contributions are valued at $19,300 while the interest earned soars to $24,299.

Not only that, the interest earned soars to double the value of the investor’s contributions over the next five years—reaching $52,243 compared to the $25,300 in principal.

By the time the investor is 75, the power of compound interest becomes even more eye-opening. While the investor’s lifetime contributions totaled $61,300, the interest earned ballooned to 25 times that value, reaching $1,489,172.

In this way, it shows that investing consistently over time can benefit investors who stick it through stock market ups and downs.

The Two Key Ingredients to Growing Money

Generally speaking, building wealth involves two key pillars: time and rate of return.

Below, we show how these key factors can impact portfolios based on varying time horizons using a hypothetical example. Importantly, just a small difference in returns can make a huge impact on a portfolio’s end value:

Annual ReturnPortfolio Value
25 Year Investment Horizon
Portfolio Value
75 Year Investment Horizon
5%$57,611$911,868
8%$88,412$4,835,188
12%$161,701$49,611,684

With this in mind, it’s important to take into account investment fees which can erode the value of your investments.

Even the difference of 1% in investment fees adds up over time, especially over the long run. Say an investor paid 1% in fees, and had an after-fee return of 9%. If they had a $100 starting investment, contributed monthly over a 25-year time span, their portfolio would be worth over $102,000 at the end of the period.

By comparison, a 10% return would have made over $119,000. In other words, they lost roughly $17,000 on their investment because of fees.

Another important factor to keep in mind is inflation. In order to preserve the value of your portfolio, its important to choose investments that beat inflation, which has historically averaged around 3.3%.

For perspective, since 1974 the S&P 500 has returned 12.5% on average annually (including reinvested dividends), 10-Year U.S. Treasury bonds have returned 6.6%, while real estate has averaged 5.6%. As we can see, each of these have outperformed inflation over longer horizons, with varying degrees of risk and return.

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