Choose wisely. There is only one correct answer to each question.
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1.
Market timing means investing your money only when you sense that the time is right.
True. Market timing is difficult to do.
2.
Dollar-cost averaging means _______.
Investing a set amount of money on a regular basis. It's an effective method of investing because it buys more shares when the price declines and fewer when the price rises.
3.
Timing the market incorrectly can not only make you miss out on performance, but it can augment it thanks to _______.
Compounding. Because compounding earns you returns on previous returns, a missed market timing can, in a sense, cost you even more.
4.
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.
5.
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.
