Choose wisely. There is only one correct answer to each question.
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1.
Which of the following statements is false?
Dollar-cost averaging always leads to better returns than lump-sum investing. In a rising market, a lump-sum investor will earn more than someone who is dollar-cost averaging into a fund will. However, dollar-cost averaging limits risk, instills discipline, and often allows investors to get into high-minimum funds for less.
2.
Market timing means investing your money only when you sense that the time is right.
True. Market timing is difficult to do.
3.
If a stock mutual fund was very volatile over a 12-month period, which of the following investors most likely comes out ahead?
The dollar-cost-averaging investor. The dollar-cost-averaging investor has probably accumulated more shares than either the timer or the lump-sum investor and had some uninvested cash on hand when the lump-sum investor was losing money.
4.
When they both have the same amount of money to invest, a lump-sum investor will always outperform a dollar cost averager because of the fact that he started earlier and could therefore take advantage of time.
False. In cases where the price of the investment fluctuates up and down, the averager can actually outperform the lump-sum investor because he is sometimes buying more shares as the price drops.
5.
To successfully outperform the market by timing, Morningstar found that an investor's calls must be right _______.
Two thirds of the time. Because stocks go up more often than they go down and because of the effects of compounding, market-timers can't just get their calls right half the time and outperform. They must be right two thirds of the time. That's a lot.
