Bankeronwheels.com Investing Quiz

How much do you know about Investing?

1. Kumiko made 3 cash injections (totalling 184,000 Japanese Yen) to buy Japanese Stocks - (i) ¥60,000 in 1988, the day before the stock market crash and start of Japanese lost decades (ii) another ¥60,000 just before the dot Com crash of 2001 and (iii) final ¥64,000 before the GFC in 2008. How much is her portfolio worth in 2018 after accounting for inflation?

¥265,000 - Despite the three market crashes, she actually made money even after accounting for inflation

¥184,000 - No losses and no gains. But at least she didn't lose out to inflation!

¥120,000 - A loss of ¥64,000 was the price to pay for bad market timing, Japan's crazy bubble and lost decades including the two market crashes that followed

2. A 70% Stocks 30% Bonds portfolio would have generated an average annual return of 9% since 1976. What's the worse that could have happened to a Medium or Long Term Investor with this portfolio since 1976?

If held for 10 years, it would have been impossible to lose money, no matter when the lump sum was invested

If held for 5 years, it would have been impossible to lose money, no matter when the lump sum was invested

The worst annual return was -14%

The worst annual return was -30%

3. You can invest in two ETFs. The first ETF has a total expense ratio of 0.2%, the second ETF costs 1% per year. You contribute $50,000 initially and then $10,000 annually over 25 years. What was the opportunity cost in holding the second ETF instead of the first, the day you retire?

Your portfolio balance is $763,238 after 25 years but could have been $873,592 if invested properly. You lose out $110,353!

Your portfolio balance is $830,261 after 25 years but could have been $873,592 if invested properly. You lose out $43,330!

Your portfolio balance is $851,622 after 25 years but could have been $873,592 if invested properly. You lose out $21,96!9

4. In the UK alone, how many brokers went bust over the past decade?

It's quite a rare event, there was one case in 2011 linked to the European Debt Crisis

At least 5 went bust. Besides, the 8th largest Bankruptcy in the US history was also a Broker failure

SVS Securities and Beaufort Securities both went bust

5. How many ETFs do I need to invest cost-efficiently and be sufficiently diversified?

Just one

At least a couple - one for Stocks and one for Bonds

Good diversification is key. It is recommended to have at least 5 Funds

6. What is true about a tailored portfolio?

I may not always need a tailored portfolio. When saving for a goal, a one-stop ETF like Vanguard LifeStrategy usually does the job and is tax efficient. It is essential to know your risk tolerance, though.

A tailored portfolio comes with more control but also need to invest in the right products (e.g. making sure they are tax-efficient)

With a tailored portfolio, I may need to rebalance my portfolio from time to time so keep the risk tolerance adjusted to my profile

7. What's the trade-off of Bond ETFs vs. Cash? When yields rise by 1%, my Bond ETF will...

Drop. The ETF price will fall by roughly 8% if it has a Duration (a measure of Bond Risk) of 8 years

No matter how high yields go, if I hold it long enough (up to 2x Duration, in years) the overall return on my ETF Investment (before Inflation!) will equal to the initial yield

If I choose to hold cash instead, I will avoid the loss on Bond ETF given its price drop, but also any upside when Bonds rally during a possible market crash. Even though this upside may not be as large as in the past, given low yields.

8. What's true about Gold?

It has historically helped in certain hyper-inflation scenarios

Unlike Bonds, it will drop in most deflationary scenarios

It may crash along Stocks during a market crash

It performs worst in a normal up to 2% interest rates market environment

9. An ETF like the iShares MSCI World allows me to ...

Cover all Markets in one ETF. It tracks the MSCI World Index, and you will get exposure to major economies in a single Equity ETF

Only track Developed Markets like the US or Japan. It won't capture most small cap stocks in those markets

Have a more granular, but not necessairly more efficient portfolio (vs. a one ETF Equity portfolio)

10. Over the past two decades...

Investing in the S&P 500 Index would have grown $10,000 to roughly $47,000 at an average rate of around 8% per year

Economic Growth didn't always go hand in hand with Stock Performance. Emerging Markets had a great first decade but then greatly disappointed over the last 10 years

Keeping cash instead of investing was risky

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Bankeronwheels.com Investing Quiz