Do Spaniards know what “risk diversification” means?

18/09/2018

The concept of “risk diversification” is clearly explained by the popular expression “don’t put all your eggs in one basket”. When investing in equities, risk diversification involves investing in a wide range of financial assets. If you invest in many different financial assets it is unlikely that the value of all of them will increase or decrease at the same time. Consequently, the total value of your investments will vary less than when the same amount is invested in one specific asset. Do Spaniards understand this basic financial concept?

The recent Survey of Financial CompetencesAbre en ventana nueva, conducted jointly by the Banco de España and the CNMV (the Spanish National Securities Market Commission) with a representative sample of adults (18-79-year-olds) in Spain, found that only 49% of the population gave the correct answer to the question: “Generally, it is possible to reduce the risk of investing in the stock market by purchasing a wide variety of shares. True or false?”. Some 24% of the respondents answered this question incorrectly, while 27% answered “don’t know”.

There are marked differences in the percentages of correct answers and don’t knows according to the demographic characteristics of the persons interviewed, in particular their sex, education, total household income and region of residence.

Specifically, the survey found that:

• For women, the percentage of correct answers is 13 percentage points lower than for men. Also, 33% of women answered “don’t know”, as compared with 21% of men.

• Respondents with a university education answered the question on risk diversification correctly 60% of the time, as against 38% of respondents with a primary education only. The difference between these two groups as regards the answer “don’t know” is 22 percentage points.

• The percentage of correct answers also varies according to the level of household income: in the case of households with an income of more than €44,500, 69% answered correctly, as against 39% in the case of households with an income of up to €14,500 per annum.

• By region, Aragon and Madrid are those with the highest percentages of correct answers (67% and 56%, respectively), while Andalusia and Castile-La Mancha have the lowest percentages (44% and 39%, respectively).