Americans’ embrace of high-risk strategies — along with a limited understanding of investing — may put their savings in jeopardy, a new poll shows.
Despite the stock market’s volatile record in 2018, at least a third of Americans would describe the market as stable, according to the results of a telephone survey conducted in April by The Harris Poll on behalf of the AICPA.
According to the same poll of 1,014 adults, 28% of Americans involved in household investment decisions said they don’t do their research when it comes to investment opportunities and developing an investment strategy. At the same time, about a third of adults involved in household investment decisions (32%) also said they typically make high-risk investments.
A volatile market, combined with a lack of understanding among average Americans about investing, could be worrisome, financial literacy advocates said.
“Over one-third of Americans characterized the market in the first couple of months of 2018 as stable when in fact it was not,” said Tracie Miller Nobles, CPA, a member of the AICPA’s National CPA Financial Literacy Commission. “This is concerning when those same Americans are investing money without knowing what is happening in the market and being able to respond as needed.”
Perhaps more disconcerting than a lack of planning is the average American’s appetite for risk. The results showed that 48% of Americans believe an unpredictable market offers opportunities to turn a quick profit through short-term patterns of buying and selling. Most of those who agreed with the get-rich-quick strategy were younger Americans, between the ages of 20 and 53. By contrast, older Americans — Baby Boomers between ages 54 and 72 — appeared more conservative, with 37% believing volatility could produce quick profits.
“I was surprised that nearly half of Americans say a volatile market offers an easy way to make a profit, and concerned because it also offers an easy way to lose a lot of money in a nondiversified or overly aggressive portfolio,” said David Almonte, CPA, a member of the AICPA’s National CPA Financial Literacy Commission. “The past year or so, at a minimum, has been an extremely volatile time in the stock market where the market will rise or fall at the drop of a tweet.”
One substantial gray area for about half of Americans is cryptocurrencies, such as bitcoin. Forty-eight percent are not familiar with this new type of asset, which can be confusing, subject to scams, and very volatile.
“Bitcoin is the highest-profile example of this. It briefly traded at $20,000 at the end of 2017 but has traded at less than half that value for a large chunk of 2018,” said Sean Stein Smith, CPA, CGMA, DBA, another member of the AICPA’s National CPA Financial Literacy Commission.
Smith recommends that potential cryptocurrency investors talk with a CPA, a lawyer, or other professional with experience in the correct wallet procedures, tracking, documentation, and monitoring the evolving regulations on taxes and reporting for crypto assets.
“Regardless of what your background is, seek out and work with a certified professional to assist with your investment decisions,” Smith said.
Many investors may need to start at the beginning — evaluating their own risk tolerance to guide an overall investment strategy.
“An investor can evaluate their personal risk tolerance on a daily basis,” Almonte said. “For example, think about how you would feel if you lost $5 from your wallet right now? Would you be sad or mad? How much would it bother you or how bad would it hurt you financially? What about $50, $100, or $1,000? The lower the dollar amount that would bring pain to you and your portfolio, financially, equates to having a lower risk tolerance. When it comes to investing, the rule of thumb is that the younger you are, the more risk you can handle because you have the most important thing in the investing world on your side: time.”
The AICPA’s 360 Degrees of Financial Literacy website is just one free resource investors can use to evaluate their personal financial risk tolerance and create an investment strategy to match. The website also offers tools to educate investors on the stock market.
“I think it depends on how much time an individual wants to spend educating themselves about the market, investment strategies, and monitoring the market,” Nobles said. “For the average person, it’s OK to manage your own money using an investment website, but you shouldn’t do this blindly.
“If an individual doesn’t have the time to educate themselves about the market or doesn’t feel confident, a trusted financial adviser is always a great idea.”
— Samiha Khanna is a freelance writer based in Durham, N.C. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, a JofA editorial director, at Kenneth.Tysiac@aicpa-cima.com.