1. Which of the following investments is most risky if held for six months.
a) A money market account
b) 100 shares of XYZ stock
c) A bank CD
d) A ten-year corporate bond
Answer: B. A single stock can go anywhere in a 6 month period. If you have less than a few years, put your money in a bank CD.
2. Which of the following would be the most risky investment for retirement in 40 years?
a) 100 shares of XYZ stock
b) A money market fund
c) A bond mutual fund
d) A 1 oz bar of gold
Answer: I’ll accept A or B for this one. In 40 years, a lot can happen to an individual stock (how many companies can you name that have been here for 40 years or more and still doing well?) You will definitely lose money in a money market fund over that time due to inflation. The best place would be a stock mutual fund (especially an index fund). A bond fund would also result in a positive return. The bar of gold would at least hold its value.
3. If you are retiring in 10 years, rank the following portfolios from most appropriate to least appropriate. Assume all have a total value of $1,000,000.
I. 50% stock mutual funds, 50% bond mutual funds
II. 100% bank CDs
III. 100% stock mutual funds
IV. 100% company stock
V. 70% stock mutual funds, 20% bond mutual funds, 10% cash
Answer: V I II III IV Since you have only $1M, you need to be somewhat conservative, therefore 100% stocks would be too risky.
4. Which of the following will result in the most retirement savings, assuming identical investment returns each year, that all investments are tax sheltered, and retirement at age 65?
a) Invest nothing until age 35, then put $2000 away per year until retirement.
b) Invest $1000 when born, then put nothing else away.
c) Invest $2000 per year from age 20 to age 30, then leave it invested but put no more away.
d) Put $100,000 per year away from age 55 until retirement.
a) Wait until age 35, then invest at 12% per year, and retire with $654,393.30.
b) Invest $1000 when born at 12% and you’ll have 2,347,856.51 at age 65.
c) Invest $2000 per year for ten years starting at age 20 , and you’ll have $4,006,876.34.
d) Put away $100,000 per year from 55 to 65 and you’ll have $2,247,027.77.
Note that if you had invested $2,000 at birth, you would have had $4,695,713.01 at age 65! Starting early helps a lot.
5. Which of the following is the least appropriate investment mix?
a) 20 years old and 100% in stocks.
b) 40 years old and 50% in stocks, 50% in bonds.
c) 30 years old and 80% in bonds and 20% in stocks.
d) 65-year-old and 60% in stocks and 40% in bonds.
Answer: C This 30-year-old has way too much in bonds and will miss out on a lot of earnings during her working career. She should have 30% or less at this age.
6. If you wanted to give $100,000 to your great, great, great-grandchildren in 100 years, what would be the best investment to leave?
a) A $100,000 home
b) $100,000 worth of gold bullion
c) $100,000 worth of XYZ stock
d) $100,000 in a money market fund.
Answer: B Gold is one of the few places where you can put money for a really long period of time and have it keep its value, and this is one of the few legitimate uses for gold, besides wedding rings. Of course, this assumes you bury it in the woods somewhere and don’t need to pay for storage fees for all of those years. A home will need maintenance, a single stock may disappear, and a money market fund will erode due to inflation.
7. If you had $3,000 to invest and wanted the chance to grow your money as quickly as possible, which of the following would be the best investment?
a) 100 shares of stock at $30 per share.
b) $3000 worth of a small cap growth mutual fund.
c) $3000 worth of a large cap value mutual fund.
d) $3000 worth of government bonds.
Answer: A A single stock is the fastest way to grow your money. Note there is risk here, and you may very well see your money sit there with no return for a while, or even decline. This might be worth it with only $3,000, but not with $300,000.
8. Which of the following portfolios has the higher reward to risk ratio?
a) $10,000 in a five-year bank CD
b) $10,000 in a stock mutual fund
c) $7,000 in a stock mutual fund and $3,000 in a bond fund
d) $10,000 in an REIT fund
Answer: C A bank CD has too low a return, although it is not risky. A stock mutual fund has a good return, but the risk is fairly high. An REIT fund has aa good return, but not as good as stocks. Having a diversified stock fund, with just a sconce of bonds to help smooth out the wild times, will provide a return almost as good as 100% stocks, but with a lot less risk.
9. Without using a calculator (no cheating), if you started with a penny and doubled it every day for 30 days, how much would you have in 30 days?
a) Less than $10
b) More than $10 but less than $1000
c) More than $1000 but less than $100,000
d) More than $100,000
Answer: D Double a penny every day for 30 days, and you’ll end up with $10,737,418.24!
10. If you take out a 30 year loan on a $100,000 house at 5% interest and pay the minimum payments every year, how many years will it take to lower the loan balance to $50,000?
a) 15 years
b) 17 years
c) 20 years
d) 25 years
Answer: C It will take you just over 20 years to own half of your home with a 30-year loan. Go for a 15-year loan instead and own your home long before your friends own 40% of theirs for just a slightly higher payment each month.
Note, some of these answers are certainly debatable. What’s your analysis?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.