Basics Beginner: Investments

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1.
When you invest in a bond you are guaranteed to receive your principal back because bonds have a maturity date and fixed term.
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False. Only US government bonds have a guaranteed return of principal if the bond is held to maturity.
2.
Stocks have outperformed every other type of investment because ______.
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Their returns are not fixed. Stocks have unlimited earning capacity.
3.
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.
4.
Cash investments, like a savings account, are often used to save for goals like _______.
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Emergency funds. Because of their easy access and safety, they are a good vehicle to add savings dollars to so you can pay for unexpected emergencies when they occur. Retirement is a long-term goal, and most investors are willing to take some risk with their money to have an opportunity to earn a higher return.
5.
Compound interest is interest that is calculated only on the principal you invest.
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False. Compound interest is interest that is calculated on the principal you invest plus any interest you earn.
6.
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.