12 Questions
What is portfolio diversification primarily intended to achieve?
Minimize risks of individual investments
What is one advantage of investing in mutual funds and ETFs?
They offer automatic exposure to hundreds or thousands of companies
Why is it a good idea to have a mix of different types of investment accounts?
To diversify tax exposure and access to money
What is the main difference between traditional and Roth 401(k)s and IRAs?
Tax treatment of contributions and withdrawals
What is one piece of advice for beginning investors?
Buy stock in companies you already know and like
Why is it potentially advantageous to invest in small-cap and mid-cap companies?
They may offer higher returns due to their growth potential
What is the primary characteristic of a portfolio investment?
It is an investment with the expectation of gain or income
Which of the following investments is NOT typically included in a portfolio investment?
A small business you operate
What is the primary goal of asset allocation?
To diversify a portfolio and balance risk and returns
Why might younger investors choose to invest primarily in stocks?
Because they have time to recover from large losses
What is the relationship between risk tolerance and investment choices?
Higher-risk investments are suitable for investors with a high risk tolerance
What is the benefit of investing in bonds?
It increases the stability of the portfolio value
Study Notes
Portfolio Investment
- A portfolio investment is a type of investment where you expect to gain value, interest, or dividend income, without directly operating the business.
- Examples of portfolio investments include: Stocks, Bonds, Mutual Funds, Exchange-traded Funds (ETFs), Real Estate Investments (REITs), Cash Equivalents (CDs, Savings Accounts).
Understanding Risk Tolerance and Asset Allocation
- The first step in investing is to determine your risk tolerance, as higher-risk investments can generate high rewards but also lead to large losses.
- Stocks generally produce the highest returns, while bonds increase the stability of the portfolio's value.
- Younger investors can primarily invest in stocks to maximize growth, while older investors can concentrate on bonds as they approach retirement and their risk tolerance decreases.
- Diversifying a portfolio through asset allocation can help manage individual investment risks.
- Mutual Funds and ETFs can provide automatic exposure to hundreds or thousands of companies, helping beginners diversify their holdings.
Starting an Investment Portfolio
- To start an investment portfolio, consider investing in companies you already know and like.
- Research companies you're familiar with, such as those in your daily life (e.g., Nike, Texas Roadhouse, Disney).
- Investing in familiar brands can increase confidence in your investment decisions.
- Consider investing in small-cap and mid-cap companies you're familiar with to spot growth stocks.
Learn about the characteristics of portfolio investments, how they differ from active business investments, and the various types of investments that can be included in a portfolio, such as stocks, bonds, and mutual funds.
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