When the Financial Industry Regulatory Authority (FINRA) asked five fundamental finance questions in 2016, fewer than one in six respondents answered them all correctly.1
Let’s say you’re one of the people with a perfect score. Beyond the basics, how much do you know? Take our quiz to find out.
1. How long do bull and bear markets for stocks generally last?
A) Bears last two times longer than bulls
B) Bulls last four times longer than bears
C) They’re just about equal
2. Over the past 25 years, which investing method has consistently generated the worst returns for long-term investors?
A) Investing a lump sum at market peaks
B) Investing a lump sum at market troughs
C) Staying in cash and not investing at all
3. True or false: You’re more likely to believe a market event will happen again in the near future because it occurred in the recent past.
4. Which of the following statements about bonds are true?
A) When interest rates rise, bond prices rise
B) Bonds never outperform stocks
C) Bonds don’t make sense for young or aggressive investors
D) All of the above
E) None of the above
5. What information can you find in a mutual fund’s prospectus?
A) The fund’s fee structure
B) The fund’s historical returns
C) The fund’s investment objectives
D) The fund’s investment risks
E) All of the above
6. True or false: You can make money in the bond market even when yields are negative.
7. Over the long term, what’s likely to be the better investment: stocks or your home?
B) Your home
8. On average, how much greater is the net worth of people who planned for retirement than that of those who didn’t?
A) Twice as great
B) Three times as great
C) Four times as great
9. What does the Sharpe Ratio measure?
A) A company’s earnings before interest, taxes, depreciation and amortization relative to its stock price
B) A mutual fund’s return relative to its benchmark
C) The return a mutual fund manager produced relative to the risk he or she took to earn that return
10. A 25-year-old who invests $100 per month and sees that investment grow 6% per year will accumulate $138,000 by age 60.2 Which of the following scenarios would result in a similar portfolio balance?
A) A 35-year-old who invests $200 per month until age 60
B) A 45-year-old who invests $480 per month until age 60
C) A 55-year-old who invests $1,990 per month until age 60
D) All of the above
The answers—and why they matter
1. Answer: B | While sustained market declines may feel like they last forever, they’re generally brief compared with sustained periods of gain. Over the past 50 years, for example, bull markets have lasted an average of 1,820 days, compared with just 433 days for bear markets.3 In other words, those with a 20-year investing horizon can afford a bad year or two, while those with far fewer years probably can’t. So be sure to stay on top of your portfolio—and make adjustments as your time horizon and circumstances change.
2. Answer: C | Even investors with terrible timing, who entered the market when prices were highest, came out ahead of those who stayed on the sidelines. For proof positive, take a look at the infographic “Is There Ever a 'Bad' Time to Invest?”
3. Answer: A | This behavioral tendency, known as “recency bias,” can skew your perception of the market and impact your long-term performance. It’s particularly detrimental after a big stock market decline: Many investors who assume the market will dip again miss out on the recovery. That’s not to say you should try to time the market—which is risky, at best—but you should be aware of behavioral biases that might otherwise work against you.
4. Answer: E | Despite the fact that the U.S. bond market is nearly twice the size of the U.S. stock market, bonds are still a relatively misunderstood investment vehicle. Many people incorrectly assume bonds are only for retirees or extremely conservative investors, when in reality there are many different kinds of bonds with varying benefits, risks and uses.
5. Answer: E | Reviewing prospectuses can tell you a lot—including which funds delivered, even during downturns. Keep in mind, however, that past performance doesn’t guarantee future success, so make sure a fund’s other attributes—such as its fees and objectives—also fit your investment strategy.
6. Answer: A | Investors can still turn a profit on a bond with a negative interest rate if there’s deflation. For example, if a bond yields –1%, but the consumer price index falls by 2%, your purchasing power would still increase. You could also come out ahead if the price of the bond rises due to demand and you choose to sell it before the bond matures at face value. For example, if you bought a bond that yields –1% for $100 and sold it a year later for $102, your overall return would be 1%.
7. Answer: A | Homes and land have actually underperformed the stock market over the past century—significantly so. According to Yale University economist Robert Shiller, inflation-adjusted home prices rose an average of 0.6% a year from 1915 to 2015. 4 By contrast, the Dow Jones Industrial Average offered an average real total return of 6.8% a year during roughly the same period (1914–2014).5
8. Answer: B | The difference between planning and not planning can be profound. According to a study by the National Bureau of Economic Research, the average planner saved $410,000—compared with just $122,000 for the average nonplanner.6
9. Answer: C | Successful mutual fund managers produce returns in excess of the risks they take, and that’s effectively what the Sharpe Ratio measures. The higher the number, the better a fund’s risk-adjusted returns. Schwab’s online mutual fund screener (available at schwab.com/fundscreener) can sort funds by their Sharpe Ratio, highest to lowest. But remember: The Sharpe Ratio is just one measure; you should consider other factors—like fees, sector exposure and your overall asset allocation—before making a decision.
10. Answer: D | The sooner you start investing, the more you can benefit from the power of compounding—and the less you’ll need to set aside along the way.. In fact, experts generally agree that if you start in your 20s, investing 10% of your income each month should be enough to build a comfortable retirement portfolio, whereas starting in your 30s means you’ll need to save and invest 15%–20% of your income to achieve the same results.
HOW’D YOU DO?
0–4 correct: It might be time to brush up on the basics.
5–7 correct: Not bad, but there’s room more improvement.
8–10 correct: Bravo! You’re a well-informed investor.
Regardless of how you scored, there’s always more to learn:
- Read Schwab’s “7 Investing Principles”—the fundamentals essential to financial success.
- Sign up for workshops in your area on investing, retirement, trading and more at schwab.com/workshops.
- Find a wealth of articles, infographics, podcasts and videos about how to make the most of your money at schwab.com/insights.
1FINRA, “Financial Capability in the United States 2016,” 07/2016.
2This example is hypothetical and is provided for illustrative purposes only. It is not intended to represent a specific investment product. Returns are prior to fees and taxes, and assume no reinvestment of dividends or interest.
3Schwab Center for Financial Research, with data from Bloomberg L.P. The market is represented by daily price returns of the S&P 500® Index. A bear market is defined as a period with a cumulative decline of at least 20% from the previous peak close. Its duration is measured as the number of days from the previous peak close to the lowest close reached after it has fallen at least 20%. Periods between bear markets are designated as bull markets. Past performance is no guarantee of future results.
4Robert Shiller, “Why Land and Homes Actually Tend to Be Disappointing Investments,” The New York Times, 07/17/2016.
5Alex J. Pollock, “The Stock Market in 100-Year Perspective,” American Enterprise Institute, 08/25/2015.
6Original data based on 1,269 observations from a special retirement planning module for the 2004 Health and Retirement Study targeting Americans over 50. Source: “Financial Literacy and Planning: Implications for Retirement Wellbeing,” 05/2011, page 29. ©2011 by Annamaria Lusardi and Olivia S. Mitchell. All rights reserved.