Strategy Beginner: Asset Allocation and the Investment Time Horizon

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1.
Long investment time horizons decrease the risk of volatile investments.
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True. Holding volatile investments for long periods increases the likelihood that long-term growth trends will overcome short-term price fluctuations.
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 of the following investment portfolios is the best example of diversification through asset allocation?
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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.
4.
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.
5.
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.