Take the "Asset Allocation for Dummies" quiz
By Dian Vujovich
It never hurts to check your investing IQ. To that end, Jerry Miccolis, co-author of “Asset Allocation For Dummies” and CIO of the wealth management firm of Brinton Eaton, has come up with a quiz worth taking.
Here it is:
•The riskiest kind of portfolio is always the most volatile one. True or False?
Answer: False. The riskiest one is a portfolio with the lowest probability of meeting your overall long-term financial needs, Miccolis says. For instance, a low-volatility portfolio wouldn’t provide the kind of growth most people in their 20s, 30s and 40s need to stay ahead of inflation. But for someone in their 80s, a volatile portfolio might be too risky.
•The best way to get good long-term investment performance is through:
A. Picking great stocks
B. Market timing
C. Never having more than 50 percent in the stock market
D. Determining a good asset allocation and sticking with it
E. Investing in five-star-rated mutual funds
Answer: D. Many studies have shown that consistent asset allocation has produced better results over the long term than any other strategy.
•You should have these asset classes in your portfolio:
A.Just stocks and bonds. Other things are too risky and unproven.
B. Besides stocks and bonds, add hedges, alternative investments, gold, oil LPs, currency bets, etc. The more diversification the better.
C. The middle ground: stocks, bonds, and low-cost alternatives such as REITs and commodities.
Answer: C. Stocks and bonds alone aren’t enough. You need to add alternatives such as REITs and commodities that “zig” when the stock and bond markets “zag,” Miccolis says. Be wary of exotic alternative investments such as hedge funds, which can be risky, with high fees.
•Investing more money in “losing” assets is a loser’s game. True or False?
Answer: False. Actually, it’s the best way to rebalance your asset classes. Hot classes eventually cool off, and cold classes eventually heat up. Systematic rebalancing is a proven way to take advantage of that fact. Along with setting up an appropriate allocation at the start, this is the key to success, Miccolis says.
•You should rebalance quarterly. True or False?
Answer: False. You should rebalance only when your portfolio gets too far away from your target allocation. Miccolis recommends rebalancing whenever your allocation gets out of whack by +/- 2 percent of your target percentage.
•You should reconsider your asset-allocation plan:
B. Every 10 years
C. Once every four years
D. Whenever you have a major life event
Answer: C and D. You only need to change your plan when you’re in a different stage of life. But it’s a good idea to check at least once every four years, Miccolis says.
•You should have the same asset allocations in all of your investment accounts: taxable, IRAs, 401(k) etc. True or False?
Answer: False. Your asset allocation plans applies to the sum total of your accounts. You’ll want to place tax-inefficient assets (such as REITS) in tax-deferred or tax-free accounts, and tax-efficient assets (such as growth sticks) in taxable accounts. For instance, it would be OK to have 100 percent of an IRA in REITs as long as your total allocation to REITs is correct.
A 9% average return always beats an 8% return. True or False?
Answer: False. While higher compound rate of return always beats a lower compound rate, an 8 percent average rate can actually result in a higher compound return than a 9 percent average yearly return if the 8% average return is more stable. If the 9% average return comes with too much volatility, you can earn less in compound return and will have less money in the end.
So, how’d you do? More importantly, learn anything?
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