Strategy Beginner: Asset Allocation and the Investment Time Horizon

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1.
When planning for retirement needs, the best asset allocation strategy is to pick a portfolio of investments and stick with it until retirement.
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False. Asset allocation should change as individuals approach retirement, the investment time horizon becomes shorter, and their reliance on income from investments increases.
2.
The possibility of crashes makes investing in stock a poor option for long-term investors.
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False. Even with the Great Depression and the 1987 "Black Monday" crash, long-term investors have still done well investing in stocks.
3.
Which statement best describes the effect of investment time horizon on asset allocation strategies?
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The longer you have to hold an investment, the more risk you can assume. This is true because long-term growth trends will tend to overcome short-term fluctuations in value. This is a key impact of investment time horizon on asset allocation.
4.
If you are investing for your childs college education, when does your investment time horizon permit you to take the most risk?
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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.
5.
Investors with long investment time horizons should always pursue volatile investments.
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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.