Investors woefully illiterate about finances, study finds A new report from the Securities and Exchange Commission shows terrible things can happen when regular people try to invest like Wall Street bigwigs. Released late last month as a requirement of the Dodd-Frank Wall Street Reform Act, the "Study Regarding Financial Literacy Among Investors" is an attempt to find out how much ordinary investors know about the stocks, bonds and other financial instruments that make up the average retail investor's retirement portfolio. The answer: Not very much. According to the study, regular investors (also called "retail" investors) "have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud." Certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, "have an even greater lack of investment knowledge than the average general population," the study found. To compile the study, the SEC drew on numerous sources, including online survey research, focus group research, public comments to the SEC, and a Library of Congress review of studies of financial literacy among American retail investors. The study was put together following the financial crisis because it was thought financial illiteracy was one of the reasons why the economy went into a tailspin. The thinking was the average investors didn't fully understand the risks associated with the investments they bought into. The SEC report's findings illustrate that lack of understanding. For example, while some investors felt they were up to speed on fee and compensation disclosures in mutual fund investments, they, in fact, were not. On one research panel, compiled from online survey respondents, panelists "had difficulty calculating hourly fees and fees based on the value of their assets under management," the SEC found. "They also had difficulty answering comprehension questions about investment adviser compensation involving the purchase of a mutual fund and identifying and computing different layers of fees based on the amount of assets under management," according to the study. The findings of the survey also showed that the average investor realizes these documents contain vital information, but weren't able to decipher them. The majority of regular investors surveyed found prospectuses highlighted important information and were well organized, but only around half of them thought they were user-friendly or written in clear, concise language that they could understand. Regulators sought input from the FINRA Foundation, a non-profit focused on investor education, for its study. Foundation President Gerri Walsh said her organization had found "a significant disconnect between self-perception and reality" among individual investors. Research undertaken in 2009 found that investors gave themselves high marks on handling their finances, yet they still took actions that hurt their financial health, she said. These behaviors included overdrawing a checking account and incurring fees, paying credit cards late and failing to maintain a fund for emergencies. "What is alarming is Americans seem to believe they are far better at handling their finances than they actually are," Walsh said, noting that this is particularly worrying, given that most investments Americans make are for their retirement. "When you stack investor knowledge against what people are doing with their retirement investments you see a frightening picture emerge," she said. Only half the Americans surveyed by the FINRA Foundation said they have a retirement plan, but when asked if they had calculated how much they need for retirement, most had not. Most didn't understand the risks associated with buying individual stocks versus mutual funds, she added. "It's frightening that people don't understand the fundamentals of risk," she said. The Federal Reserve under Chairman Ben Bernanke has stressed the importance of financial literacy following the financial crisis and the ensuing Great Recession, which left millions without work and wiped out countless retirement accounts. A report from the Council on Economic Education released in 2011 found that just 22 U.S. states require high school students to take an economics class, while the number of states that require a high school course in personal finance is just 14. "The 2011 Survey shows that while there has clearly been progress since the first survey in 1998, over the last two years the trend is slowing and in some cases moving backwards," the report said.