Strategy Beginner: Asset Allocation and the Investment Time Horizon

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1.
Short investment time horizons increase the risk of volatile investments.
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True. Holding volatile investments for short periods increases the risk that your investment may not recover from a short-term price drop.
2.
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.
3.
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.
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.
A new retiree should shift all of his or her investments to low-risk securities like bonds.
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False. New retirees may still have an investment time horizon of 20 years or more, which allows them to take advantage of some exposure in the stock market.