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Investors Flunk Vanguard Test

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Mutual fund investors scored an average of 37% on a test of their fund and market savvy. The quiz, sponsored by the Vanguard Group and Money Magazine, tested investor knowledge of mutual funds basics and market fundamentals.

Some 1500 randomly selected mutual fund investors were given a test containing 20 basic questions. The highest average score for a question on the quiz was 63% for "If you invest in a 401(k) plan at work, you are not eligible to contribute to an IRA." (true or false) See below (a) for answer.

The lowest average score (9%) resulted in responses to "Which market benchmark or stock exchange is the best gauge of the performance of the entire stock market." See below (b) for answer.

The results seem to support the necessity of Vanguard's call for increased investor education. As Vanguard Chairman and CEO John Brennan said, "This year's results are disappointing...It is clear we must step up our education initiatives...in particular to focus on the fundamentals of fund investing, including risk, reward, cost, and taxes."

According to Vanguard, mutual fund investors seem to be increasingly undereducated. Brennan asserts that this can in part be traced to the recent influx of mutual fund investors. The numbers are astounding. In 1995, approximately 30 million households owned mutual funds. By mid 1999, the number had reached over 48 million households according to the Investment Company Institute.