US Not in Top 10 for Basic Financial Literacy Test
When it comes to managing our personal finances, it appears that Americans could use a little help. In the global financial literacy quiz Americans did not even make the top 10! Two-thirds of the world’s population couldn’t answer five basic financial literacy questions correctly.
The test—created by Standard & Poor’s, Gallup, the World Bank, and George Washington University—was posed to 150,000 people in more than 140 countries last year. It tests understanding of risk, inflation, interest, and compound interest. You can test your financial literacy and take the quiz on the survey website.
The question that tripped most people up was about how best to protect your money when you invest. Here are some factors to help you understand why diversification is the best solution:
Spread the risk: Diversification is the practice of spreading your investments around, so that exposure to any one type of asset is limited. As the old saying goes, it’s better not to put all your eggs in one basket. If you have a wider investment strategy, it protects you if one type of investment loses value.
Balance your portfolio: Investing in a combination of different types of vehicles could reduce your portfolio's sensitivity to market swings or major news events that have an effect on stock prices.  There are many vehicles for investment – real estate, stocks, and bonds. One way to ensure diversification is with a mutual fund that includes several types of assets.
Assets react differently: Every type of investment has its own growth rate and risk. Government securities, fixed income securities, stocks, and real estate will not react in the same way to adverse events. The bond and equity markets tend to move in opposite directions, so when you have a portfolio that’s diversified, one asset could potentially offset losses in another.
Diversification is not a guarantee against loss, but it can reduce the impact of risk, fraud, and bad information on your portfolio. Always consult an experienced investment advisor who can work with you to establish your needs, goals and risk tolerance.
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