Questions and Answers
When would it be a good idea to put your money in a savings account instead of investing it?
When you're looking to maintain the value of your money with a little bit of growth.
When would it be a good idea to invest your money instead of putting it in a savings account?
When you won't need the money for a long time.
Which of the following statements about investing is FALSE?
Why might an investor want to invest in the stock market?
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People invest in the stock market because:
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Which of the following is NOT a reason why people invest in the stock market?
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Historically, long-term returns of the stock market have been negative.
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In the past 90 years, the stock market has had positive returns, averaging 10% annually.
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A ______ is a fixed income investment that represents a loan from an investor to a borrower.
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A _____ is a short-term investment that is considered highly liquid.
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A _____ is a share of ownership in a company.
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Which of the following statements about stocks is FALSE?
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Which of the following statements about bonds is TRUE?
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Which of the following statements about cash equivalents is FALSE?
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Which of the following is NOT a consideration when determining your asset allocation?
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How comfortable you feel taking the risk of losing your money refers to:
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How long you plan to keep your investments in your portfolio refers to:
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Miguel is 25 years old, has low financial health, a long time horizon and a high risk tolerance. Which asset allocation would you recommend?
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Yena is 38 years old, has average financial health, an intermediate time horizon, and an average risk tolerance. Which asset allocation would you recommend?
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Jason is 58 years old, has strong financial health, a short time horizon, and an average risk tolerance. Which asset allocation would you recommend?
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What is diversification?
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___________ is an investment strategy that mixes a wide variety of investments from different categories within a portfolio.
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A well diversified portfolio needs about 3 to 5 stocks from different categories.
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You can diversify your portfolio by investing all your money in one industry.
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A well-diversified portfolio needs about 20-25 stocks from different categories.
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How is a mutual fund different than an index fund?
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How is an index fund different than an exchange-traded fund?
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Study Notes
Savings vs. Investment
- Savings accounts are ideal for maintaining value with minimal growth, suitable for short-term needs.
- Investing is preferable when the money can be set aside for a long period, allowing for potentially higher returns.
Misconceptions about Investing
- A common misconception is that investing aims solely at preserving money's value with slight growth.
- Investing is not a guaranteed way to make money; it involves risks.
Stock Market Fundamentals
- Investing in the stock market allows individuals to share in company profits and typically offers higher returns than savings accounts.
- The time value of money emphasizes that current funds hold greater value due to their growth potential.
Historical Stock Market Performance
- Long-term stock market returns have been positive, averaging 10% annually over the past 90 years.
Financial Instruments
- Bonds represent fixed-income investments where investors lend money to borrowers, receiving the principal plus interest upon maturity.
- Cash equivalents are highly liquid, short-term investments, while stocks represent ownership shares in companies.
Bonds and Cash Equivalents
- Bonds return the initial loan amount along with interest upon maturity.
- Misconceptions about cash equivalents include their perceived riskiness; they are considered low risk.
Asset Allocation Considerations
- Important factors for asset allocation include risk tolerance (the ability to endure losses) and time horizon (the duration for holding investments).
- Portfolio diversification is crucial, but it shouldn't confuse with individual asset allocations.
Recommended Asset Allocations
- For a 25-year-old with high risk tolerance and a long time horizon, an allocation of 85% stocks to 15% bonds/cash equivalents is advisable.
- A 38-year-old with average financial health and risk tolerance may benefit from a 65% stock to 35% bonds/cash equivalents ratio.
- A 58-year-old with strong financial health and a short time horizon should consider a 45% stock to 55% bonds/cash equivalents allocation.
Diversification Strategy
- Diversification involves mixing various investments from different categories within a portfolio, critical for risk management.
- A well-diversified portfolio typically requires 20-25 stocks across different sectors, contrary to the belief that 3-5 stocks suffice.
Fund Management Styles
- Mutual funds are actively managed by professionals, while index funds follow a passive management strategy.
- Exchange-traded funds (ETFs) are traded directly on stock exchanges, differing from index funds which do not trade in this manner.
Entrepreneurial Definition
- An entrepreneur is an individual who initiates a new business and assumes all associated risks and rewards.
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Description
This flashcard set focuses on financial decision-making, particularly the choice between savings accounts and investments. It covers scenarios where each option is most beneficial, enhancing understanding of personal finance concepts.
