The Securities Litigation Expert Blog

The Disclosure Documents of Complex Investments are Hard to Read

Posted by Jack Duval

Feb 5, 2014 7:33:40 AM

This blog post continues our expert analysis of complex investments.

As discussed in yesterday's blog post, Schema Theory addresses how the lack of background knowledge and vocabulary by investors about investments limits the effectiveness of disclosure documents and verbal communication to convey meaning about their investments.

In addition to Schema Theory, which addresses the complexity of the content of a text, there is an entire scientific discipline used to evaluate the structure of the words and sentences of a text.  This disciple studies the readability of a text irrespective of its content.

Although there are many different metrics used to evaluate the readability of a text, the most common look at the average number of words per sentence and the average length of words used. The longer the sentences and words used, the less readable the text is, and vice versa.

Readability analyses have their origins with the U.S. Navy in evaluating instruction and training manuals.  They are also used extensively by book publishers to evaluate the appropriate grade level for text books, novels, and other written materials for students.

The Raygor Estimate

Readability measures can be used to evaluate investment disclosure documents.  For the purposes of this paper, I am using the Raygor Estimate, which has a readability scale from third grade to college professor levels.[1]

To set the scale in context we have compared the two sports stories from yesterday's blog post and other texts for their Raygor Estimate reading levels:

The Blackrock Basic Value Fund Prospectus

Now let us examine a risk disclosure extract from the Blackrock Basic Value Fund prospectus:

Risk is inherent in all investing. The value of your investment in the Fund, as well as the amount of return you receive on your investment, may fluctuate significantly from day to day and over time. You may lose part or all of your investment in the Fund or your investment may not perform as well as other similar investments. The following is a summary description of principal risks of investing in the Fund. 

Equity Securities Risk — Stock markets are volatile. The price of equity securities fluctuates based on changes in a company’s financial condition and overall market and economic conditions.

Foreign Securities Risk — Foreign investments often involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. These risks include:

The Fund generally holds its foreign securities and cash in foreign banks and securities depositories, which may be recently organized or new to the foreign custody business and may be subject to only limited or no regulatory oversight.

Changes in foreign currency exchange rates can affect the value of the Fund’s portfolio.

The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position.

The governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries.

Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to protect investors that are comparable to U.S. securities laws.

Settlement and clearance procedures in certain foreign markets may result in delays in payment for or delivery of securities not typically associated with settlement and clearance of U.S. investments

The European financial markets have recently experienced volatility and adverse trends due to concerns about economic downturns in, or rising government debt levels of several European countries. These events have adversely affected the exchange rate of the Euro and may spread to other countries in Europe, including countries that do not use the Euro. These events may affect the value and liquidity of certain of the Fund’s investments.

Investment Style Risk — Because different kinds of stocks go in and out of favor depending on market conditions, the Fund’s performance may be better or worse than other funds with different investment styles (e.g., growth vs. value, large cap vs. small cap).

Market Risk and Selection Risk — Market risk is the risk that one or more markets in which the Fund invests will go down in value, including the possibility that the markets will go down sharply and unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the securities selected[2]

Graduate and Ph.D. Level Disclosure Documents

The Raygor Estimate reading level for the Basic Value Fund Prospectus extract above is post-graduate freshman, first month of class. That is, this prospectus is written on the 17th grade level.

This is telling because the Basic Value Fund is a mutual fund, one of the more simple types of investments, and yet even this prospectus is written on the graduate level.

In research that is forthcoming from Accelerant, we have found that almost all investment disclosure documents are written on the graduate or Ph.D. level.

Needless to say, this puts these documents beyond the readability of the typical investor - and even some professionals.  (See our coverage of this phenomenon here.)

Combining Schema Theory with Readability statistics show why disclosure documents are so difficult for the typical retail investor to understand.

Very simply, the typical retail investor lacks the background knowledge and vocabulary to understand the content of what is written.  Furthermore the structure of typical disclosure documents makes them even more complex and less comprehensible.

Either one of these characteristics makes understanding of disclosure documents by retail investors highly unlikely. Taken together, they make it virtually impossible.  To further illustrate this point, recall the cricket story extract from yesterday's blog post. Most American sports fans would not be able to understand what was written.  Remarkably, this is true for a story that was written on the tenth grade level.

Image if the same story, with the same domain specific words, had been written on the graduate or PhD level and you have an idea of the task required of the typical retail investor to understand most disclosure documents.

In my experience, the typical investor is aware of their ignorance about investments and thus relies upon their broker or investment advisor to read and understand the disclosure documents for them.


The Accelerant roster of securities experts with complex investment backgrounds includes:

Steve Pomerantz, Ph.D.Tom Boczar, Esq., CFATom Brakke, CFAGerry Guild, CFA, and John Duval, Sr.

You can find the complete roster here.


[1]                 The Raygor Estimate uses average sentence and word length to calculate readability. The longer the sentences and words, the higher the grade level needed to understand the text.

[2]                 Basic Value Fund Prospectus, Dated October 26, 2012.  Available at, accessed May 31, 2013. 

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Topics: Complex Investments, Securities Expert, Raygor Estimate, Investment Complexity, Schema Theory

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