Making frequent trades

Starting to invest early

Reinvesting earnings

Minimizing risk

It’s more difficult to calculate, so fewer people use compound interest, making more profits for those who do.

Compound interest accumulates very rapidly, so you only have to save for 3 years or fewer to earn far more money.

Compound interest is attached to the stocks with the highest risk, so you get the highest interest on them.

In compound interest, you earn interest on not only your principal, but also on the interest you’ve already made.

The stock price could decrease and you could lose money

Unforeseen developments could cause the company to go out of business

Stock prices are hard to predict in the short-term

Demand could unexpectedly increase for your company’s stock

Investing in one company’s stock is quite risky.

Investing your whole savings in the stock market is a bad financial move.

One year probably isn’t enough time for one stock to turn $700 into a month’s vacation.

All of the above.

Your stocks and bonds

Your time horizon and when you will need access to the money

Your debits and credits

Your education level and ethnicity

More

Exactly the same

Less

An index fund tracking the S&P 500, an ETF tracking the technology sector, a government bond, an individual stock

A government bond, an index fund tracking the S&P 500, an ETF tracking the technology sector, an individual stock

A government bond, An ETF tracking the technology sector, an individual stock, an index fund tracking the S&P 500

An index fund tracking the S&P 500, a government bond, an individual stock, an ETF tracking the technology sector

Dividends are earned when you sell your shares for a higher price than when you bought them

Dividends are typically set between $20 and $30 per share

Dividends cannot legally be reinvested in the same company where they were earned

Dividends are usually paid quarterly by well established publicly traded companies

Wanda will make $1.50 by selling her share.

Wanda will receive her full $25 purchase price back, but she won’t make any profit.

Wanda cannot sell her share on June 13; she must wait for the price to go above $25 in order to sell.

Wanda will receive $23.50 for her share, meaning she lost $1.50 on the investment

The Dow, S&P 500, and Nasdaq all measure the same stocks but in different quantities.

Unlike individual company stocks, which can fall in value, stock indexes always go up in value.

Stock brokers and individual investors can use the indexes to get a sense of how the market is performing.

All countries trade on the same stock markets and, therefore, use the same 3 stock indexes to assess performance.

Sam profit was $1100, and Jessica’s profit was $1,400

Sam and Jessica both had a total profit of $2

Sam had a profit of $100, and Jessica had a profit of $400

Sam and Jessica both had a total profit of $1,000

default risk

coupon

speculating

par value

True

False

The price of Juan’s bond will increase

More investors will be willing to buy Juan’s bond

The interest rate of Juan’s bond will increase to reflect the current market

The price of Juan’s bond will decrease

Your risk is diversified over multiple bonds, so if one does poorly, your entire fund isn’t ruined

Bond funds are more cost effective because they don't require the constant buying and selling of individual bonds

You get to choose all of the individual bonds you want to put into your fund.

A bond professional has chosen the makeup of the funds, so you benefit from their knowledge.

Dividends are automatically reinvested into the company's stock, earning you more money.

Once you purchase the stock, the dividend remains constant as long as you own the stock

It is possible to earn dividends on your investment, even if the value of the stock has decreased from when you first bought it.

By law, all publicly traded companies must pay their shareholders dividends 4 times per year.

Allows you to pick and choose individual stocks for investment.

Typically have lower expense ratios (costs) because it doesn't require an active manager to make investment decisions.

Research has shown that they typically outperform actively managed investment funds.

Since indices (plural of index) are typically made up of stock in many companies they provide investors diversification which reduces risk compared to investing in an individual stock.

Fees for a passively managed fund are typically lower than those for an actively managed fund

Passively managed funds are generally seen as low risk investments

A passively managed fund guarantees the average return of the securities it includes

Passively managed funds are managed by a fund manager

She should start investing immediately in a passively managed index fund and add to her investments on a regular basis.

She should set up an online brokerage account, choose her favorite company, and buy a small number of shares in that company.

She should hire a stock broker to make the decisions for her.

She should invest in bonds so that she has extra income to rely on.

Target date funds automatically adjust your asset allocation as you get to retirement

Target date funds are actively managed by a fund manager

Target date funds only invest in low-risk bonds

Target date funds offer low fees while also promising to outperform the market

All of these financial products are ways to invest in the stock market

Purchasing individual stocks is usually the best way to invest in the stock market since the cost to buy stocks is so low

The past investment performance of a mutual fund or index fund is no guarantee of future results

Since mutual funds and index funds hold hundreds of stocks, they usually provide diversification benefits to investors which make them less risky than holding individual stocks

Length of the fund fact sheet

Diversification across asset classes

Management fees and expense ratios

Companies held by the fund

Investment fees are extremely low.

Robo-advisors reduce the human emotional element from investing by having the computer make asset allocation decisions based on your answers to risk profile questions.

Since robo-advisors create diversified investment portfolios through automation, they are able to offer their services to investors with much smaller accounts than a typical financial advisor

Since robo-advisors use sophisticated computer modeling and typically make similar recommendations, they eliminate your need to educate yourself about investing.

When you're young, you have more disposable income available for investments.

Young people are naturally better risk takers than older adults, so it's a great advantage in the stock market.

Young people have fewer responsibilities, and therefore, more time to research to find the perfect stock to invest in.

Young people have time on their side, so investments made in their 20s have decades to compound and grow in value.

True

False

Investors have different tolerances for risk and may make bad decisions with a 100% stock portfolio, such as selling out when stock prices have had a significant drop.

Most investors do have a 100% of their money in stocks since bonds are so unpopular

Bonds typically do best when stocks do best so they make returns even better when they are combined

Bonds are riskier than stocks so you want to own both

Your net worth

The amount of debt you have

How much investing experience you have

Your time horizon and risk tolerance

The risk of losing money in the stock market increases the longer you are invested in the market which means you better be good at "timing the market"

The longer you hold an investment in a diversified index fund, the lower the probability that you will lose money with that investment

The returns in the stock market have a negative bias, in other words the stock market returns decline more frequently than they rise

The more bonds that you hold in your portfolio, the higher your expected returns will be

True

False

Typically no capital gains tax

Limits on how much you can invest

No penalties for withdrawing your money

Used for retirement savings

Most Americans will have enough money from Social Security to retire comfortably.

In order to be eligible for Social Security, you must have worked for 35 years.

In order to be eligible for Social Security, you must have worked at the SAME job for 10 years.

If you save for your own retirement in a 401(k) or IRA, you still have to pay Social Security taxes from your paycheck.

You'll receive more Social Security benefits if you wait until age 70 instead of collecting your benefits at age 65.

Traditional IRA

Pension

401(k)

Trick question -- you can't invest in retirement until you've worked long enough to become vested

Contribute her $150/mo to Social Security -- it's the best way to make sure she gets her money back

Contribute $75/mo to her 401(k) and $75/mo to an IRA, so that she's diversified.

Save up money in a bank account until she has enough to max out her 401(k), and then invest.

Contribute the full $150/mo to the 401(k) because her company will match that full amount, "doubling" her investment every month.

Dollar cost averaging works best if you are picking and choosing different stocks to invest in each month

Dollar cost averaging is most advantageous for investors who are getting close to retirement age

Dollar cost averaging refers to the fact that you can buy more shares with the same size investment when share prices are low.

Dollar cost averaging allows you to automatically sell your shares when the price is low.

Do I want to make a guaranteed return of 6% or 8%?

Do I want to pay taxes now (Roth IRA) or later (Traditional IRA)?

Do I want to pay taxes now (Traditional IRA) or later (Roth IRA)?

What type of investments do I want to make?

Bill worries about the risks in the stock market so his primary method of saving for retirement is to set aside $2,000 per year into a savings account.

Juana invests $1,500 a year in her company's 401(k) plan and her company provides a $500 match every year. Her investment choice: the S&P500 index fund.

Francis has a very tight budget and is committed to saving $2,000 a year in his company's 401(k) plan once he is 35 years old after he has a house and has paid off his student loans.

Kamil's company has a 401(k) plan with a match program. He forgot to fill out the paperwork so just puts $1,500 a year in an IRA. His investment choice is the S&P500 index fund.

You don’t pay taxes on your investments’ growth each year.

You can invest your 401(k) into a wider variety of asset types than you could with an IRA.

Your employer may match some of your 401(k) contributions.

You can contribute up to $19,500, which is more than the limits for an IRA.