Youthful investors blind to hard market laws Beijing

• Source: Global Times
• [23:11 January 20 2010]
• Comments

But however well-off, these investors turned out to be relatively unsophisticated in their approach, with 14 percent of them listing lucky numbers as a very important consideration when buying stocks.

And despite the proven advantages of diversification, which start to kick in by holding somewhere between 10 to 16 stocks, a whopping 65 percent held one to three stocks.

The consensus on how much these stock holdings would appreciate was a surprising 27 percent, with 37 percent of investors expecting an annual return of greater than 80 percent.

These expectations are way off the benchmarks set by the widely quoted Ibbotson & Sinquefield "Stocks, Bonds, Bills and Inflation" study, which showed compound annual returns of 11.3 percent and a 13.3 annual arithmetic mean return for US stocks over the 1926-99 period.

Furthermore, 82 percent could not correctly explain what a P/E (price/earnings) ratio is and 71 percent did not understand the term "market capitalization" (share price times outstanding shares).

A further 78 percent did not have a response to the factors behind the worldwide financial crisis and 49 percent could not define book value (basically assets minus liabilities).

According to the study there is also a lack of experience in trading shares, with 40 percent of investors having less than a year's experience and only 27 percent saying they have been investing for over five years.

And when asked whether they were "long-term investors," 60 percent of respondents answered "yes," although when queried as to what "long-term" referred to they responded "less than six months."

What the survey reveals is a widespread lack of knowledge of basic investment fundamentals.

It can be argued that investing in emerging markets doesn't always play to the fundamentals (given the high levels of risk, rumor and emotion involved), but knowing them still allows investors to make better decisions.

With 52 million retail accounts expecting a 27 percent return on their investment, it may be in everyone's best interests to manage expectations a bit through further education on investment fundamentals.

The government might also want to hold back on introducing new derivatives, such as stock index futures, until the basics are well understood.

The author is a volunteer at Bankers without Borders and also serves as managing director at Highway West Capital Advisors. highwaywest@email.com