Review Questions

1. Why is it unwise to use savings vehicles for investment goals or investment vehicles for savings dollars? (See page 2-1)

2. Why is it important to consider both current income and total return when choosing an investment to match a financial goal? (See pages 2-2 and 2-8)

3. Why is it important to consider rate of return and real rate of return when choosing an investment to match a financial goal? (See page 2-2)

4. Why is it important to consider the risk/rate-of-return relationship when choosing an investment to match a financial goal? (See pages 2-3 and 2-8)

5. Well-planned diversification of an investment portfolio can reduce much of the total risk associated with investing. Name three approaches to diversification. (See page 2-4)

6. Why does diversification have the potential to both increase and decrease investment returns? (See page 2-4)

7. How do you implement a dollar-cost averaging investment strategy? What are the benefits of such an approach? (See page 2-4)

8. Based on the principles of time-value of money, what advice would you give a young person who asserts s/he cannot afford to invest today, but prefers to wait until later when earnings increase? (See pages 2-5 and 2-6)

9. Relate the asset allocation models shown in Figure 4 to the Compound Annual Rate of Return and the Pyramid of Investment Risk, shown in Figures 1 and 2, respectively. Assuming any truth to the proposition, “the higher the risk, the higher the return,” which asset allocation model would be expected to have the highest return? (See pages 2-2, 2-3, and 2-7)

10. When considering the four factors that influence your choice of asset allocation, why might it be unwise to use a money market mutual fund as the primary investment vehicle for accumulating retirement funds? (See page 2-7)

11. Investment earnings may be taxable, tax-deferred, or tax exempt. How does this status affect the choice of investment strategies and the applicable financial goal(s)? (See page 2-8)

12. It is important to understand your own investment preferences. However, it is also important that the preferences shown in Figure 5 are considered when matching investment products with financial goals. Use the principles introduced in this unit to explain this relationship. (See page 2-9)

Just Do It!! Acting on What You Learned

Because Internet sites change frequently, the uniform resource locator (URL) for the specific tool or page is not given below. Instead, the URL for the site, and instructions for navigating within the site are provided. It is our hope that this method will encourage you to explore and learn from the site, and more importantly, avoid the message: “Error: Site Not Found.”

Disclaimer: References to commercial sites are not an endorsement of the company or the financial products or services offered. These sites are included only because of their educational value; sites provided by competing companies may offer similar benefit. We encourage you to explore other sites of your choice.

1. Visit the Fund Selector or Fund Quickrank pages at www.morningstar.com to view mutual funds ranked by total return over different time periods. Do the same mutual funds consistently appear on the lists? Or, use the Stock Selector or Stock Quickrank pages to review total returns for individual common stocks. Assuming you had the money, did you identify a mutual fund or stock you would purchase? What was the range of total returns reported? Were you surprised?

2. Review investment or retirement statements for your own accounts. Is the total return reported? If not, use the Morningstar Internet site above to determine the total return.

3. Many of the investment company Internet sites provide excellent educational pages. For additional information and analytical tools related to this unit, see the following:

www.tiaa-cref.org From the General Information page, proceed to Learn About for discussions of diversification, asset allocation, and common asset allocation mistakes.

www.fidelity.com From the Planning and Retirement page, proceed to Investment Planning to use the Asset Allocation Planner.

www.dreyfus.com Use the Systematic Investment Tool to learn more about dollar cost averaging.

4. To learn more about the time value of money and the benefits of compounding, visit one of the following sites:

www.econedlink.org Work through the Time Value of Money lesson to learn more about the mathematical computations involved.

www.moolera.com/investing/bcompound.html Visit the Time and Compounding page to learn more about the effects of starting to invest at different ages.

5. To determine your own risk tolerance, visit one of the following:

http://www.moolera.com/quiz.html Test your Risk Tolerance on the Money Tools page.

http://moneycentral.msn.com Take the Risk Tolerance Quiz found under Investing Basics

on the Investing page.

6. Critically evaluate your personal situation using the following questions:

· Have you (in consultation with other members of your household) established, your savings and investment goals?

· Given your time horizon, risk tolerance, and knowledge of historical rates of returns, what asset allocation model might be most appropriate for your investment goals? How does that model match your current allocation?

· Are your current holdings diversified? Which strategies have you used?

· If you are not currently dollar-cost averaging into one or more investments, what changes would be necessary in your monthly cash management plan to accommodate this strategy?

· What are the tax implications of your current investment situation? Have you considered the tax consequences of investment earnings in your choices?

Notes