Investment Quiz

from daveramsey.com on 16 Jul 2009
 
Think you know Dave? Think you know investing? Take the short quiz below to find out how much you know. Don't worry, we'll explain the correct answers to you after you take the quiz. Good luck!

1. A mutual fund is a collection of money from different investors used to purchase stocks, bonds, etc., and is managed by a fund manager.
 
True

 
False
Detailed Answer: A mutual fund is a fund operated by an investment company that pools your money with hundreds of other investors to buy stocks, bonds, options, commodities, or money market securities. These funds offer investors the advantages of diversification and professional management.
2. A loaded fund is:
 
A mutual fund that consists of more than 10 stocks.

 
A mutual fund that has a sales charge.

 
A fund that can get you arrested if you take it on a plane.

Detailed Answer: A load is just one of the factors to consider when purchasing shares of a mutual fund. Don't pass up a great fund that has a load to get in a bad fund without one. The managed loaded fund may far surpass the investment returns of a no-load fund. Also, all costs must be weighed to compare loaded funds versus no-load funds. No-load funds can actually be more expensive in some situations.
3. Is a loaded fund better than a no-load fund?
 
Yes

 
No

 
Neither better nor worse

Detailed Answer: Some financial planners do sell no load funds; others do not. Dave Ramsey does not dwell on whether a fund has a load or no load as much as he pays attention to how well the fund has done over long periods of time. There are lots of good mutual funds. Dave says to put your money in them and just leave it alone.

But keep in mind one of the main weaknesses of a no load mutual fund is that you usually have the ability to make major changes (transferring funds, withdrawals, etc.) without having to talk to your financial planner first. The result is that many investors jump out of good funds during bad times. This turns into buying high and selling low, a bad plan. A good financial planner will slow you down, remind you of your long term goals, and give you the confidence to weather bad markets.
4. What is the minimum length of time for which Dave recommends investing?
 
One year

 
Three years

 
Five years

Detailed Answer: Dave considers investing to be a minimum of 5 years. Less than that is simply saving and should not be done with mutual funds.
5. Dave recommends investing in a single stock.
 
True

 
False

Detailed Answer: The performance of the stock market as a whole has averaged near 12 percent annually; yet the average return of the single stock investor is closer to 7 percent annually. Also, if you place much of your nest egg with one or two single stocks, your risk skyrockets.
6. What are annuities?
 
A savings account within a stock.

 
A savings or investment account with a life insurance company.

 
The annual return on your investment.

Detailed Answer: When you invest money in an annuity with a life insurance company, your investment grows tax deferred. Annuities do require a little more education than some other investments, and done without understanding the rules or at the wrong time, annuities can be a train wreck. If done after other pre-tax investments and with money that is going to be left alone for plenty of time, it can be an option for getting tax deferred growth. Dave doesn't personally own any annuities himself.
7. Generally speaking, the more sophisticated investment is usually the better investment.
 
True

 
False

Detailed Answer: Absolutely false! Just because an investment looks and sounds sophisticated doesn't mean you are going to profit from it. Never put money in anything you don't understand.
8. What is diversification?
 
The spreading of investments across different areas to reduce risk.

 
Putting the majority of your nest egg into one investment to maximize profits.

 
Investing equally for both retirement and college.

Detailed Answer: Diversification is an investment strategy that involves buying a variety of different investments that are not highly associated with each other, in order to reduce risk. Dave suggests the following diversification: 25% in a growth fund, 25% in an aggressive growth fund, 25% in a growth & income fund, 25% in an international fund
9. Dave suggests investing in mutual funds that:
 
Are new and expected to grow.

 
Have at least a three year successful track record.

 
Have at least a five year successful track record.

Detailed Answer: A mutual fund's track record is the most important criterion you can use to help you decide whether to invest your money in it. Don't buy baby funds. If the fund is only three years old, it still needs diapers. Dave suggests at least a 5 year track record. Preferably, you want a fund that is old enough to have seen hard times. If the fund has at least a 10 to 15 percent average return over ten to fifteen year, you have a good fund.
10. When it comes to investing, Dave always suggests getting advice from whom?
 
A financial advisor recommended by co-workers.

 
A financial advisor who has the heart of a teacher.

 
Advice? You don't need advice!

Detailed Answer: Don't make investment decisions by yourself. Dave always recommends getting advice from a financial pro. The financial advisor you choose should have the heart of a teacher and explain investing to you in a way you can understand. Would you like to know what professional financial advisor Dave recommends in your area? Then click here now!
 
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