Chapter 4-6 Review

What kinds of cognitive biases and behaviors can prevent people from making smart investing decisions?

• Staying calm when the market is experiencing a downturn

• Buying stocks when prices are low and selling them when they're high

• Exiting the market because that's what everyone else is doing

• Investing in a diversified portfolio instead of trying to time the market

An actively managed mutual fund...

• Generally has lower fees than an index fund

• Is managed by a fund manager who charges a fee

• Always performs better than an index fund

• Is a mix of two types of stocks and two types of bonds to diversify your portfolio

As a shareholder (stockholder) in a public company, what are the benefits available to you?

• You may receive dividends from the company, if the company pays them, and you have ownership of a portion of the company

• You must receive dividends from the company (all companies must pay them? and you can select members of the management team (for example, the Chief Executive Officer (CEO)

• You can select members of the management team and vote for the members of the Board of Directors

• You have ownership of a portion of the company and receive coupon payments from the issuer

Why are Index Funds such a popular investing option?

• They are a mix of 2-3 individual stocks that can help you diversify your portfolio

• They provide a low-cost, diversified investment option that closely matches the overall return of a given index, such as the S&P 500

• They are actively managed by a fund manager

• They are managed by robo-advisors that guarantee higher returns than the overall stock market

What is NOT a good strategy to build wealth and gain financial freedom?

• Invest with a short term focus

• Diversify

• Take advantage of the power of compound interest

• Don't be tempting by market distractions

Is it possible to pick winning stocks?

• Yes because after seeing success in the investing world, you now have the skills to always pick new winners

• Most of the times it's luck, not skill, that contributes to successful stock picking

• Yes, and stock market professionals that manage large funds can usually win at the game of picking good stocks

• Yes, if you invest in individual stock versus index funds

What is NOT a mistake that you can make when investing?

• Develop a reliance on media or the crowd

• Deviate from your plan

• Buy at the exact wrong time

• Starting early in your career

Behavioral biases cause us to want to time the market perfectly, but...

• this is contrary to what really works in the market, which is investing for the long term and staying in the market

• if you miss some of the best days of the market, it's not a big deal

• we have a tendency to not value the first bit of information we receive when making decisions