Quiz: Do You Know the Keys to Financial Security?

The following quiz has been designed based on economic journalist Knight Kiplinger’s “8 Keys to Financial Security”, an enlightening publication with Kiplinger’s own personal financial wisdom.  The article was first introduced in 1997 in the 50th anniversary of Kiplinger Magazine, and again in both 2002 and 2008.  Along with being an economic journalist and active philanthropist, Kiplinger is the Editor in Chief of Kiplinger Washington Editors in Washington D.C.

1. Where should your money be spent or invested first?
a. Giving money to my children
b. Investing in myself
c. Paying off debts
d. Increasing my investment portfolio

ANSWER: (b) Investing in myself.  Developing and increasing your knowledge and skills through continuous education and training should be considered your most valuable asset, since this will ultimately determine your overall earning power.

2. What is one of the most important items to acquire as you move forward in life?
a. Stocks/bonds
b. A house
c. 401K
d. Insurance

ANSWER: (d) Insurance.  Prior to investing in financial assets, make sure you have enough insurance to cover the big risks in life such as serious illness, disability, or early death.  If an emergency arises, insurance will take care of it and you will not have to dip into your financial investments as much.

3. What items should you purchase using borrowing methods (credit)?
a. Everything should be purchased with credit
b. Low price, short-term items that you can pay off quickly, such as clothing, travel, and entertainment
c. High price, long-term items such as education courses or a car or home
d. You should never borrow or use credit

ANSWER: (c) High price, long-term items.  Use your borrowing methods wisely to purchase investments of lasting value, and make sure to pay off as much as possible as quickly as possible to avoid interest fees.

4. In what order should your payments take place?
a. Investments, savings, bills, credit card
b. Credit card, investments, bills, savings
c. Savings, bills, credit card, investments
d. Bills, investments, credit card, savings

ANSWER: (a) Investments, savings, bills, credit card. Trim and prioritize your spending so that you are able to pay into your mutual fund, money market, or brokerage account first so these investments can continue to grow.  Then add money to your savings account/emergency fund and pay all of your regular monthly bills.  Finish up by making a payment toward your credit card or other debts.

5.  What is the best method to investing?
a. Take big risks; the more times you swing, the more homeruns you will hit.
b. Take moderate risks; you hit some and you miss some.
c. Take a risk and swing only when you think the time is right.
d. Don’t take any risks at all; you can’t lose if you don’t play.

ANSWER: (b) Take moderate risks.  Use dollar-cost averaging to invest regularly in markets whether they seem good, bad, or indifferent, and maintain the patience to wait out the occasional bear market.

6. What should be included in your investment portfolio?
a. Strictly liquid assets, such as savings and cash accounts
b. Only safer investments like bonds and CDs
c. Only high return assets such as stocks and high-yield bonds
d. All of the above

ANSWER: (d) All of the above. Successful investors know that each asset category will perform at some point, and on the reverse, each category will also have a time of lull.  Having a diversified portfolio with all of these types of assets will ensure the best performance over the long-haul.

7. Which famous quote should be your personal money mantra?
a. “We are what we repeatedly do; excellence, then, is not an act, but a habit.” –Aristotle
b. “I’d like to live as a poor man with lots of money.” –Pablo Picasso
c. “You only live once, but if you work it right, once is enough.” –Joe E. Lewis
d. “A penny saved is a penny earned.” –Benjamin Franklin

ANSWER: (a) Aristotle said it best.  Saving money is always a good idea (Franklin), but making investments allows for growth you wouldn’t otherwise experience.  Also, you shouldn’t have to feel as if you are living in poverty (Picasso), but living beyond your means (Lewis) is not the right concept either.  Instead, get in the habit of making consistent and informed financial decisions on a daily basis, and you can lead an agreeable lifestyle while keeping your long-term goals achievable.  If you need to, look closely at your current lifestyle and budget, trim back dispensable spending, and invest and save on a regular basis.

8. How generous should you be when giving your time and money to others.
a. I should occasionally give a small amount to others
b. Giving to others should come first
c. I shouldn’t give anything to others
d. I should give what I can afford to give, when I can afford it

ANSWER: (d) I should give what I can afford to give, when I can afford it.  You own financial security is connected to the financial, physical, and spiritual health of others in your community, in our nation, and in our world.  Sharing your good fortune by donating your money, time, and talent helps to create a stronger economy and a healthier, safer world, which benefits us all in the long run.

Everyone is Different (and Better!): Part 1

“A market is a combined behavior of thousands of people responding to information, misinformation, and whim.”

-Kenneth Chang

 

 

Garrison Keillor talks about the mythical village of Lake Wobegon, where all the village children are “above average.”  The financial industry is a bit like those children.  Every segment and company think they are best.  Truthfully, each one offers certain structural strengths.

Experience suggests that clients often reach decisions by default – the firm where an advisor works, for instance, or a bank close to home.  These are understandable choices, but hardly an informed way to decide.  An objective consultant would likely consider a whole matrix of factors including safety, convenience, flexibility, financial expertise, investment expertise, ease of evaluation, and overall costs of service.

Safety and security.  One topic that commands attention is client safety.  Virtually every investment client should be concerned about the people and firms they use.  Surprisingly, though, there is a lot of bad information about this general subject.  Perhaps we can shed some light.

First, it’s important to recognize that different regulations apply to different types of firms (all claiming that they’re best and safest).  Most brokerage firms fall under scrutiny of the Securities and Exchange Commission (SEC).  So do many Registered Investment Advisors (RIA), although smaller RIAs are covered by state regulation (In Missouri, RIAs are regulated by the Secretary of State Securities Division). 

Most investment professionals are required to pass examinations conducted by the National Association of Securities Dealers (NASD), a self-regulatory body of the investment industry.  Various examinations apply to different kinds of securities, but virtually everyone selling or managing investments in our industry is required to pass at least one examination.  (Passing isn’t always enough – in Missouri, one qualifying officer of an RIA firm must earn at least an 80% grade on the Series 65 exam.  That’s 10% higher than a “passing” grade.)

Banks, as a rule, are governed by banking regulators.  So, the trust department of a bank or independent trust company is regulated by the Office of the Comptroller of the Currency (OCC) or state banking department.  Certain bank employees that sell investments – through a discount brokerage division, perhaps – must pass NASD exams, too. 

Surprisingly, I spent fifteen years as a trust officer for three different banks and never had to pass any securities exams.  Banks were specifically exempted from most securities laws because they fall under banking statutes instead.  Both banking and investment firms are required to meet certain capital, insurance, and bonding guidelines.

Many investment firms are also registered with the United States Department of Labor (DOL) to manage pension and other retirement plans.  The DOL provides oversight for retirement plans and advisors must register to comply.  Special bonding is required for each retirement plan, both for the employer and investment advisors.

Registered Investment Advisors actively manage client investments.  A federal law requires separate custodial accounts for each client.  In plain English, this means that investments (stocks, bonds, or mutual funds) must be held at another investment firm (this law provides protection against two obvious perils: that an RIA employee might steal cash or securities, or that an RIA firm might declare bankruptcy.  Clearly requiring an outside custodian avoids both situations).

Each custodian brings another level of safety.  Charles Schwab (one choice for many people), for instance, insures each client account against brokerage default up to $100 million.  Other custodians provide similar insurance.  Remember, custodial accounts are where client investments are actually held, so this protection is extremely important.

Several other types of protection are covered through bonding or insurance.  The best investment firms or advisors carry professional liability insurance as protection against claims of error or negligence.  Separate coverage should protect against employee dishonesty or fraud.  Firms that handle retirement accounts must have special ERISA bonds.

Excerpt taken from Million Dollar Management: Simple Lessons to Use Wealth Management Principles for Your Family Investments by Dan Danford (with Gary Myers), 2002