Investing for long-term goals such as buying a home, putting the kids through college or making retirement really be your "golden years," is the foundation of financial planning for all families.
Rather than "playing" the stocks and bonds markets, the successful investor has the courage to invest wisely - easy to say but not so easy to do considering that a conservative person's wise investment is a high-flyer's dead horse.Whether you are ultra-conservative or have a taste for running some risk in return for the possibility of a better-than-average return, the process of long-term investing involves not only goal-setting, but also educating yourself about the numerous types of investments available and becoming familiar with basic investment terminology.
To test your investment savvy, complete the quiz below, which was prepared by Jim Kuttner, an academic associate of the College for Financial Planning, a Denver-based organization that represents investment counselors holding the designation Certified Financial Planner. Choose only one answer for each question.
1. The Standard & Poor's 500 stock index contains:
a. industrial and transportation stocks only
b. industrial, transportation and utility stocks only
c. industrial, transportation, utility and financial stocks
2. U.S. Treasury Note interest payments are:
a. tax-free at the federal level but taxable at the state level
b. tax-free at the state level but taxable at the federal level
c. tax-free at both the federal and state levels
3. The lowest rating for investment-grade bonds is:
a. A
b. BBB
c. BB
4. The "face value" of a bond is:
a. the amount paid by the issuer when the bond matures
b. its price in the secondary market
c. the amount paid by the investor when the bond is issued.
5. "Registered" bonds are ones for which:
a. payment of a debt by the issuer is secured by insurance
b. coupons must be presented for payment of interest
c. approval has been granted by the Securities and Exchange Commission
6. What is the best description of the technique of investing in common stock using dollar-cost averaging?
a. Varying amounts of money are invested in the same stock in irregular intervals.
b. A fixed sum of money is invested in the same stock at a specified price.
c. A fixed sum of money is invested in the same stock at regular intervals.
7. A characteristic of common stock is that it:
a. is typically subject to purchasing power risk
b. is a debt instrument
c. represents ownership in a company
8. Which one of the following describes the technique of investing in common stock using a margin account?
a. The investor borrows a portion of the funds needed to purchase the stock.
b. The investor requests that the broker purchase the stock at a specified price.
c. The investor purchases the stock over a period of time at regular intervals.
9. Which one of the following option transactions would be the best choice if you expected the underlying stock to fall significantly?
a. buy a call
b. buy a put
c. sell a call
10. If interest rates fall, the mutual fund that will increase most in value is a:
a. long-term bond fund
b. short-term bond fund
c. money market fund
11. The "load" associated with mutual funds may best be described as:
a. an advisory fee
b. a sales charge
c. the expected rate of return
12. Beta:
a. is an indicator of relative systematic risk
b. indicates the degree of default risk
c. has been replaced by the 12b-1 fee
13. Systematic (market) risk:
a. can be reduced through diversification
b. increases with the level of interest rates
c. cannot be eliminated through diversification
14. The risk/return trade-off principal generally requires that the investor:
a. assume increasing levels of risk for increased potential return
b. forego current income to maximize capital gains
c. assume decreasing levels of risk for increased potential return
15. The primary determinant of the trade-off between risk and return is:
a. market volatility
b. amount invested
c. time
Answers: 1. c; 2. b; 3. b; 4. a; 5. b; 6. c; 7. c; 8. a; 9. b; 10. a; 11. b; 12. a; 13. c; 14. a; 15. c.
Scoring analysis: 12-15: Terrific. 8-11: Well informed. 4-7: Somewhat informed. Below 4: Consider seeking some expert advice.