Basics Beginner: Investments

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1.
What is the most commonly used type of cash investment?
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Savings account. A savings account is made up of cash you deposit, but unlike the cash in your pocket, it pays some interest to you.
2.
What does diversification do for a mutual fund?
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Spread risk. By spreading risk among many different securities in a fund, you can reduce the damage that a downturn in a few of them can cause.
3.
What is asset allocation?
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Determining how much money to spend on different types of assets. Asset allocation is a big term, but it refers to how we distribute our money among investments.
4.
If you own a bond with an interest rate of 4% and rates increase to 5%, what will happen to the value of the bond if you try to sell it?
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It will decrease. If interest rates rise, the price of the bond on the market will decline because investors will seek bonds with these new, higher rates. This occurs with US government bonds too, and if you were to sell it before it matures, you would sell for less than you invested. If you hold the US government bond until its maturity date, you will receive all of your principal back.
5.
When you buy shares of stock in a company, you _______.
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All of the above. Owning stock comes with all these benefits, though it should be noted that dividends are not always guaranteed to be paid.
6.
Social Security is meant to cover _______ of your retirement income needs.
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Some. While it can be an important piece of your income during retirement, most of your income should come from your retirement investments. Social Security was never intended to provide the majority of someone's retirement income.