Your Financial IQ [or, Finance for Poets, Part VI]

We asked our broker friend Eric Rice to devise a shortcut list of sample questions that would determine your financial intelligence quotient. It is Eric's belief -- and one we share -- that any smart, educated person, even one who is mathematically challenged, should be able to direct and control his or her investments. Think about it. No one has a greater interest in preserving and enlarging your capital than you do. Poetry is, to invert Wallace Stevens's aphorism, a kind of money, and yet American poets with academic appointments are said to spend an average of twelve minutes a year, maximum, on their retirement plans.

See how you score on the quickie exam Eric drew up to evaluate your potential as a self-actuated Wall Street amateur in the best sense of that old-fashioned word.

(1) Investors drawn to the precious metals market, and to the yellow metal in particular, are known on the Street as "gold bugs." Explain the derivation of this term.

(2) Is "dollar-cost averaging" a really better method than "lump sum" investing?

(3) Should the basis of the Dow Jones Industrial Average be re-calculated to make stock prices a less significant factor than market capitalization?

(4) What is the hidden risk in "index funds"?

(5) True or false: when interest rates go up, the value of bonds goes down.

(6) Is AMEX a buy at 60? Is DIS a buy at 45?

(7) If you hold 150 shares of Coca Cola and the firm announces a two-for-one stock split effective in August, should you sell or hold the new shares (presuming that they are long-term holdings and therefore taxed more favorably than stocks held for less than one year)?

(8) When, as now, money market funds yield zero, and saving accounts return less than one percent, what should you do with money you can't afford to lose? 

(9) What is a DRIP?

(10) If you have $50,000 invested equally in ExxonMobil, IBM, Johnson and Johnson, Intel, and Pepsi, are you properly diversified in today's market?

Eric's answers :

(1) Poe's story.
(2) Yes, except when a "lump sum" (inheritance, lottery) lands in your lap and must be handled all at once
(3) Yes and no. The issue is under debate.
(4) Index funds promise you "average" returns. Is that what you want? Are you American?
(5) True
(6) AMEX probably, DIS definitely
(7) If you agree wth Warren Buffet's buy-and-hold strategy you keep all the shares.
(8) You put emergency money in a savings account, and your core investment cash account in a short-term bond fund. Also, you load up on dividend-growing stocks.
(9) Dividend Re-Investment Plans (where you receive your dividends not in cash but in additonal shares of stock)
(10) Eric would say yes, though a purist might question the doubling-down in tech (Intel, IBM), a sector Eric favors for superior short-term performance, If you had an additional fifty thousand and wanted to continue a blue chip strategy, you might add equal amounts of Caterpillar, Wells Fargo, Chevron, Proctor and Gamble, and Microsoft.

Comments

[Barbara Scott]

Thank you for the lesson. But how about the term "bubble"? Is Apple stock a "bubble"? Is China's economy a bubble? I'm forever blowing bubbles. Help! -- Barbara Scott

[used cat parts]

No one has a higher attention in protecting and enhancing your investment than you do.