Strategy Beginner: Asset Allocation and the Investment Time Horizon

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1.
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.
2.
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.
3.
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.
4.
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.
5.
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.