It is not surprising that investing is the subject of so much misinformation. The securities industry fosters false beliefs because it suits its economic interests to do so.
The consequences for investors are grave. The historical returns of most investors barely keep pace with inflation and taxes. Many investors take too much risk because their brokers and advisors don't know how to measure risk. Trillions of dollars of hard earned money has been lost because of the analyst scandals, the tech bust and sub prime loan mess.
The sad fact is that well-informed investors could have achieved market returns and minimized the impact of these tragic losses.
The cycle of talking heads who claim to know the future and brokers who recommend portfolios of stocks, actively managed mutual funds and hyped up "alternative investments", continues to this day.
Most investors still don't understand that they are gamblers and the brokers and advisors are the casinos.
In my last trip to Las Vegas, I didn't see any billion dollar casinos owned by the gamblers, although they certainly paid for them!
I have prepared the "The Smartest Investment Quiz You'll Ever Take" to help investors understand the consequences of their investment choices. Next week, I will publish the correct answers.
My goal is a lofty one: I want to change the way you invest.
Question # 1
What is the most important decision an investor can make about her investments?
A. Which stocks to buy
B. Which broker or financial advisor to use
C. Determining when the markets will go up or down
D. The division of your portfolio between stocks, bonds and cash.
Question # 2
What is the most reliable source of stock market returns?
A. Risk
B. Stock fundamentals
C. The skill of fund managers
D. None of the Above.
Question # 3
Which of the following consistently achieve market returns?
A. Investors who pick the best performing stocks
B Investors who are able to correctly time the markets
C. The top actively managed mutual funds
D. None of the above.
Question # 4
True or False, studies of investor returns over a 20 year period demonstrate that the average stock investor would have achieved more than triple her returns after inflation by investing in a one year Treasury Note.
A. True
B. False
Question # 5
On average, what percent of the top performing mutual fund managers are able to repeat that performance in the following year:
A. More than 70%
B. More than 50%
C. More than 25%
D. Less than 20%
Question # 6
Most mutual fund investors achieve returns that are a fraction of the reported returns of these funds. To understand why this is true, you need to understand which of the following:
A. Dollar cost averaging
B. Dollar weighted vs. time weighted returns
C. Standard deviation
D. None of the above
Question # 7
There is grave concern that our economy might be headed into a recession. Given this concern, which of the following would be the most prudent course for investors?
A. Unload stocks and buy commodities
B. Unload stocks and buy short or intermediate term bonds
C. Change your asset allocation to a more conservative asset allocation
D. If your asset allocation is appropriate for you, do nothing.
Question # 8
A recent study compared the performance of mutual funds selected by investors on their own with broker-sold funds. Select the answer that most closely represents its findings:
A. Broker-sold funds outperformed by an annual amount of $8.8 billion.
B. Broker-sold funds underperformed by an annual amount of $8.8 billion.
C. The results of both categories of funds was about equal
D. None of the above.
Question # 9
One study compared the performance in 2006 of Jim Cramer's stock picks with a globally diversified, index portfolio consisting of all stocks. Which statement most accurately reflects the results of this study:
A. The Cramer picks had a return of 22.51%. The index fund lost 0.2%.
B The index fund had a return of 22.51%. The Cramer picks lost 0.2%.
C. The Cramer picks and the index fund had approximately equal returns, but both underperformed the returns of the S & P 500 index.
D. The returns of the Cramer picks and the index fund equaled the returns of the S & P 500 index.
Question # 10
For the 20 year period from 1987-2006, investors in Warren Buffet's company, Berkshire Hathaway, "beat the markets." Which of the following is the most accurate response to this statement.
A. True
B. False
C. False, because the returns of Berkshire Hathaway stock were the same as the returns of an index of emerging market value stocks, which had a similar risk.
D. True, because the returns of Berkshire Hathaway stock were greater than the returns of an index of emerging market value stocks, which had a similar risk.
Thanks for taking this Quiz!
If you have questions, please add them as Comments to this blog and I will answer as many of them as I can. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.