Planning Beginner: Asset Allocation and the Investment Time Horizon

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Investors with long investment time horizons should always pursue volatile investments.

True

False

False. While longer horizons can help overcome short-term market fluctuations, investors who rely on investment capital or income for living expenses or emergency needs should take steps to protect their capital.

Long investment time horizons decrease the risk of volatile investments.

True

False

True. Holding volatile investments for long periods increases the likelihood that long-term growth trends will overcome short-term price fluctuations.

Why might an asset allocation that is heavily weighted toward stocks, with only a small portion in bonds, be more appropriate for a 28-year old planning for retirement than for a 60-year old?

Younger people are less concerned about losing money than older people.

The 28-year old has a longer time horizon, and this will allow him or her to ride out temporary market fluctuations and take advantage of the long-term growth potential in the stock market.

This asset allocation would not be more appropriate for the younger person; the 60-year old should be equally heavily invested in stocks or stock mutual funds.

The general consensus among experts is that one should have zero exposure to the risks of the stock market once reaching the age of 60.

The 28-year old has a longer time horizon, and this will allow him or her to ride out temporary market fluctuations and take advantage of the long-term growth potential in the stock market. The older investor will have less time to make up for any short-term downturns in the stock market.

Which of the following investment portfolios is the best example of diversification through asset allocation?

Industrial, utility, and transportation stocks

US Treasury bonds and municipal bonds

Stocks, bonds, and cash (e.g., certificates of deposit)

Certificates of deposit, passbook savings accounts, and money market accounts

Stocks, bonds, and cash (e.g., certificates of deposit). Unlike the other choices, these all represent different asset classes -- asset allocation consists of building a portfolio of different asset classes.

If you are investing for your childs college education, when does your investment time horizon permit you to take the most risk?

When your child is born

When your child is in his or her mid-teens

When your child is entering college

When your child is a college junior

When your child is born. At this point, you have the longest to invest before you need to cash in on your investments. Your investment time horizon is the longest, thus permitting you to allocate capital to assets that are more volatile.