Saving and Investing Test Review

All of the following are reasons to invest, EXCEPT…

• To minimize the impact on inflation, which causes you to lose purchasing power
• To earn a consistent rate of return with lower risk than typical savings accounts
• To build wealth by reinvesting your returns and allowing them to compound
• To earn higher average rates of return than you would in a typical savings account

Which of the following statements BEST describes investing?

• Putting $100 per month into an FDIC-insured bank account for short-term goals
• Buying and selling stocks within the same day to take advantage of short-term price variation
• Reducing the purchasing power of your money over time
• Buying assets, like stocks, with the intention to hold them and grow your wealth over the long term.

An investor can best harness the power of compounding by doing all of the following, EXCEPT…

• Making frequent trades
• Starting to invest early
• Reinvesting earnings
• Minimizing risk

All of the following are strategies to reduce risk EXCEPT…

• Holding your investments for at least five years
• Making sure your investments are diversified
• Hiring an investment manager who you think can beat the market
• Investing small amounts of money over longer periods of time

Leaving your investments in the stock market alone for at least five years is a good way to reduce risk because…

• It allows your investments to earn more interest
• It keeps you from reacting to dips in the market and selling at too low of a price
• Fees are waived for investments held for over five years
• You get a bonus from the company if you invest for five years

Which of the following is an example of diversification?

• Putting the majority of your money into a savings account and investing the rest
• Investing different amounts of money every month
• Purchasing shares of stock in a variety of companies and industries
• Using multiple investment managers to get different opinions

What does it mean when someone says “Good investing is boring”?

• There should be little to no change in how your portfolio performs
• You should avoid talking to anyone about how your investments are performing
• You’re better off making long-term investments that don’t require day-to-day management
• You should avoid checking how your investments are doing for at least 10 years

All of the following are recommended strategies for beginner investors EXCEPT…

• Try to pick winning stocks and beat the market
• Recognize cognitive biases that may be influencing your decisions
• Minimize expense ratios to cut back on costs
• Choose your investments based on your risk tolerance

Which of the following is a characteristic of a brokerage account?

• Typically no capital gains tax
• Limits on how much you can invest
• No penalties for withdrawing your money
• Require a large amount of money to open an account

What is loss aversion?

• Our tendency to fear losses more than we enjoy gains.
• The impulse of investing in something that offers a higher return.
• The act of calculating your potential investment profit before actually investing money.
• The belief that an investment will always increase in value and never lose money.