Strategy Beginner: Asset Allocation and the Investment Time Horizon

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1.
If you start investing for your newborn childs college education, you should avoid risking your capital in the stock market.
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False. With a long investment time horizon, more volatile investments like stocks will do the best job of generating growth in value.
2.
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.
3.
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.
4.
Why might an asset allocation that is heavily weighted toward stocks, with only a small portion in bonds, be more appropriate for a 28-year old planning for retirement than for a 60-year old?
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The 28-year old has a longer time horizon, and this will allow him or her to ride out temporary market fluctuations and take advantage of the long-term growth potential in the stock market. The older investor will have less time to make up for any short-term downturns in the stock market.
5.
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.