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.

PIMCO: Stay The Course

PIMCO (PacificInvestment Management Company, LLC) produced a market-relevant article earlier this month entitled “Stay The Course”.  This article discusses four (4) reasons why long-term investors should remain focused on their goals and not fear rising rates.  Click here to view the full article (with visuals!) in PDF form.

1)  Rising Rates Build Income:  With interest being the primary driver of bond returns, reinvesting into a gradually rising rate environment can actually help build long-term growth.  When rates rise, new bonds may pay higher, which can increase what you (as a lender) receive in the long run.
 
2)  Lower Volatility Helps Preserve Capital:  During uneasy times in the market, investors are often reminded why fixed income investments can be solid anchors for their portfolios.  Bonds have historically been less volatile than stocks, while also providing capital preservation, income and growth, and low-to-negative correlations to equities.
 
3)  Cash ‘Safety’ Comes at a Price:  Investors concerned about market fluctuations and short-term bond volatility may be tempted to withdraw their investments until prices stabilize.  However, with cash and money market investments typically yielding rate of returns close to zero, and especially after accounting for inflation, these types of investments can actually provide a negative return.  Compounding over the long-term, maintaining investments in bonds will almost always generate a higher rate of return.
 
4)  Experts Have Access to a Diverse Toolset:  Although mainstream media tends to focus on U.S. Treasuries (which are the most sensitive to changing rates), the “market of bonds” is exceedingly diverse and global, including corporate and high yield bonds, mortgage-backed securities, floating rate issuers, emerging market bonds, and many others.  Since each sector or asset class responds differently to economic and market trends, a skilled bond fund manager should be capable of diversifying a portfolio which can defend against capital losses while also capturing a range of growth opportunities.
 
PIMCO is the world’s largest bond investor and one of the world’s largest active global fixed income investment managers.  As of the end of 2012, PIMCO had $2 trillion in assets under management.

Ten Things You Need to Know About Stocks

 

      This week’s “pin” features stocks. We have compiled a list of basic stock fundamentals with links to further explain the material provided.

 

    1)   Sectors.  Sectors are a way of categorizing and classifying stocks. They are typically classified by type of business or industry.  The fastest growing sectors are currently the health and technology industries, although that varies often. 

    2)   Growth vs. Value.  Growth stocks are just as they sound: they are anticipated to grow at an above-average rate.  Value stocks, on the other hand, are viewed as bargains in the sense that the market has undervalued the stock and the investor hopes to get in before the market corrects the price.

   3)   Company size (“capitalization”).  A company’s size is measured by its market capitalization.   Large-cap companies are typically established with a lower growth prospective than small cap. Small-cap companies tend to have higher growth potential in the long run, but investors may see more volatility with small-cap stocks since small companies have a higher likelihood of running into trouble as they expand.

   4)   Risk.  The possibility of a stock performing worse than expected.  There are many types of risk that an investor must consider, such as market risk, political risk, business risk, and others.  Typically, the larger the risk, the larger the possibility for return. The best way to minimize your risk is to properly diversify your portfolio.

   5)   Taxation.  Your income and capital gains are taxed unless the stocks are held in certain types of retirement accounts.  Some investment strategies can reduce tax liability, but as with all other investment considerations, this must be done with care and prudence.   

   6)   Trade fees.   These fees are imposed when stock is bought or sold.  Some brokers will label this fee as a “transaction fee.”  Trade fees can range in price, so be sure to research a broker’s fees before making transactions.

   7)   Cyclical vs. Defensive.  Cyclical stocks are sensitive to the economic cycle.  In tight economic times, people are less likely to spend money on unnecessary items, such as retail and entertainment, which can impact cyclical stock prices.  Defensive stocks include necessary items, such as food and medicine.  For this reason, defensive stocks tend to change very little when the economy declines.

   8)   Selecting stocks.   The first step in selecting a stock to purchase is to determine your objective and risk tolerance.  You must also remember the importance of diversification, as investing in a single company is much riskier than investing in, say, eight or ten companies.  The more you know about a company and about the current market, the better.  You can also narrow your search for stocks using a stock screening tool.   

   9)   Diversification.  This is a technique used to reduce risk in a portfolio whereby a variety of investments are placed within a portfolio instead of investing in only a few companies.  As an example, Charles Schwab & Company has created the following visual representation showing how to diversify your portfolio:

 

   10) Stocks vs. Mutual Funds.  Mutual funds are used to diversify a portfolio better than individual stocks allow.  Each mutual fund contains holdings of several different individual securities, allowing an investor to easily spread his or her investment dollars among several companies instead of just one.  Another advantage of mutual funds over stocks is that each fund has a professional manager of its own, who buys and sells securities within the fund so the individual investor doesn’t have to.  Every investor is different, so individual circumstances must be fully considered when constructing a portfolio. 

 

Don’t forget to check out our boards on Pinterest!