Proving The Wall Street Journal Wrong

8 Questions | Total Attempts: 56

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Proving The Wall Street Journal Wrong

On September 5, 2012 the WSJ reported the results of a survey of 28,000 individuals on the basic concepts of investing. While 67% of respondents rated their own overall financial knowledge as “high”, the results of the test tell a different story. Over 50% failed to answer most questions correctly. The SEC concluded that “US retail investors lack basic financial literacy and have a weak grasp of elementary financial concepts. ” As you know, Hill Investment Group's investment philosophy is supported by academic evidence, and our goal is to make sure our clients know and understand the basic tenets of our approach. This quiz is intended to show us how well we've done in our efforts to educate you.


Questions and Answers
  • 1. 
    A friend brags that he bought a bond with a 9% yield. What should you do?
    • A. 

      Ignore him. The role of fixed income is to mitigate risk. You can assume the friend is taking undue risk by owning it, because current rates for short-term, high quality fixed income aren't that high.

    • B. 

      Ask for more details and load up on this bond.

    • C. 

      Tell him that you can beat that rate by buying a Greek bond.

  • 2. 
    Your portfolio had a negative return over the past year. What should you do?
    • A. 

      Start watching CNBC, panic, and sell everything until the news and market returns are more encouraging.

    • B. 

      Find out what went wrong. Figure out how to get out early next time.

    • C. 

      Remain disciplined. Expect down markets and take a longer view than 1-, 3-, or 5-year periods.

  • 3. 
    Why does the academic evidence suggest that investors tilt towards small and value stocks?
    • A. 

      Risk and return are related. Smaller and more value-tilted stocks provide higher expected returns over the long run because they are riskier.

    • B. 

      It's a gamble. We hope we're right.

    • C. 

      Smaller companies tend to be more closely tied to the US economy. We don't like international investments.

  • 4. 
    You are getting close to retirement. Should you change your allocation to a more conservative style?
    • A. 

      It's probably best to get everything into cash. You never know what will happen in the stock market.

    • B. 

      No. We want to stay aggressive to maximize our wealth. We figure the worst thing that could happen is running out of money and living with our kids.

    • C. 

      It depends. We're more interested in understanding what asset allocation gives us the best odds of success to meet our retirement goals.

  • 5. 
    The S&P 500 had a disappointing quarter, year or decade. What does that mean to you?
    • A. 

      You should also be disappointed. Why didn't you see the bear market coming?

    • B. 

      It's not concerning for several reasons: we know 1.) the S&P 500 might only represent a small portion of our investment portfolio, 2.) if needed, we've got fixed income to weather the bad times, and 3.) we expect bad markets and need them to justify higher expected returns over the long run.

    • C. 

      If the US ecomony is doing poorly, surely the international markets will be even worse.

  • 6. 
    Morningstar gave a 5-Star rating to a mutual fund. Is this useful information and should you act on it?
    • A. 

      No. This information only represents past history and is not a predictor of future results.

    • B. 

      Yes. Sell everything and buy the fund.

    • C. 

      Yes. Continue to research other Morningstar material because they're great at predicting mutual fund winners.

  • 7. 
    You read an article about some economic problems in the US or a foreign country. What should you do?
    • A. 

      Call your friends and ask what they think.

    • B. 

      Dig deeper into the problem by searching the internet.

    • C. 

      Read it for entertainment or information. Then turn the page and read something that will focus your attention elsewhere.

  • 8. 
    Why do our equity portfolios typically own approximately 10,000-12,000 stocks all over the world?
    • A. 

      Good question. It seems like too much diversification. Maybe we should just buy the best 10-20 stocks.

    • B. 

      We want broad diversification. It's difficult, if not impossible, to predict which stocks will do better than the overall market.

    • C. 

      It gives us bragging rights with friends.

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