Financial planning resources are easy to find (If you’re so rich, why aren’t you smart?)
How many times have we heard (or said), “If you’re so smart, why aren’t you rich?”
Whether it’s from a scholarly paper with the subtitle “an analysis of the asymptotic properties of Pareto optimal consumption allocations in a stochastic general equilibrium model with heterogeneous consumers,” or from the 1992 episode of “Batman” with the same title, somehow the connection between intelligence and wealth seems to make sense.
It probably would be bad form to ask someone who’s very wealthy, “If you’re so rich, why aren’t you smart?”
So where can we turn to test our personal store of smarts related to investing? Here are some readily accessible resources for building investment intelligence.
The Securities and Exchange Commission provides a number of tools for investors. A helpful real-time quiz appears on the Web at www.sec.gov/investor/tools/quiz.htm. It’s a 10-question multiple-choice quiz that provides explanations for each answer.
For example, “Over the past 70 years, the type of investment that has earned the most money, or the highest rate of return, for investors has been A. Stocks, B. Corporate Bonds, C. Savings accounts, D. Don’t know.”
Answer: A. Stocks.
If you had invested $1 in the stocks of large companies in 1925 and re-invested all dividends, your dollar would be worth $2,350 at the end of 1998. If the same dollar had been invested in corporate bonds, it would be worth $61, and in U.S. Treasury bills, it would be worth $15.
Another example is the explanation of stocks vs. bonds. When you buy a bond, you’re lending money to the company. The company promises to pay you interest and to return your money on a specific date. This promise generally makes bonds safer than stocks, but bonds can be risky. Unlike stockholders, bond-holders know how much money they will make, unless the company goes out of business.
When you own stock, you own a part of the company. There are no guarantees of profits, or even that you’ll get your original investment back, but you might make money in two ways.
First, the stock price can rise if the company does well and other investors want to buy the stock. If a stock’s price rises from $10 to $12, the $2 increase is called a “capital gain” or “appreciation.”
Second, a company sometimes pays out a part of its profits to stockholders — that’s called a “dividend.”
An even more detailed resource is provided by the National Association of Securities Dealers (NASD) on its web site at apps.nasd.com/Investor_Information/quiz/quiz_score.asp.
One quiz question: If a company files for bankruptcy, which of the following securities is most at risk of becoming worthless?
Answer: Among those with claims to a bankrupt company’s assets, shareholders of common stock have the last claim on any assets, falling in line behind secured creditors, bondholders and owners of preferred shares. Common shareholders may not receive anything if the secured and unsecured creditors’ claims aren’t fully repaid.
Another example is, which is the best definition of “selling short”? Answer: Short selling involves borrowing stock from a broker through a margin account and selling it, with the understanding that it must later be bought back and returned to the broker.
If the stock declines in value, as the short seller hopes, the investor will profit since the value of the stock borrowed and sold would be higher than the stock subsequently purchased and returned to the broker. However, if the stock rises in value, the investor must pay the difference to make good on the stock owed to the broker.
The NASD also provides useful calculators to help us with our arithmetic intelligence. At
www.nasd.com/InvestorInformation/ToolsCalculators/index.htm, the online tools and calculators include:
- Analyze mutual-fund and ETF fees and expenses.
- Look up mutual-fund breakpoint information.
- Retirement calculator.
- College calculator.
- Investor knowledge quiz.
- Loan calculator.
- Savings calculator.
- Kids’ calculator.
- Saving for my summer vacation.
- The Stock Market Game.
- Minimum required distribution calculator.
- Accrued interest calculator.
The NASD also presents a comprehensive glossary of financial terms atwww.finra.com/Resources/Glossary/EntireGlossary/index.htm.
The SEC Web site also provides calculators, including: mutual-fund cost calculators, tax-free vs. taxable yield comparison calculator, college savings calculator, loan calculator, savings calculator, mutual-fund breakpoint search tool, Social Security retirement planner, ballpark estimate retirement calculator, and 529 college savings plan expense calculator.
History hasn’t proven that intelligence guarantees wealth. But by utilizing the above resources, perhaps we won’t be the “fool and his money” that have been parted.
© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.