Your weekend investing test

This week, we’ll go back to first principals. Specifically, we’ll talk about the basic concepts of investing—information you should know whether you’ve just started investing or been investing for years.

Dollar Cost Averaging

Answer: C

“Investing the same amount of money at regular intervals in the same securities regardless of price.”

Dollar-cost averaging is an investment strategy where an investor divides up the total amount to be invested across periodic purchases of a target asset, regardless of the asset's price.This approach is intended to reduce the risk of investing a large amount at an inopportune time and potentially suffering significant losses. By investing the same fixed dollar amount at regular intervals, the investor ends up purchasing more shares when prices are lower and fewer shares when prices are higher, resulting in a lower average cost per share over time. Dollar-cost averaging can help take the emotion out of investing and avoid the pitfalls of trying to time the market.

You can check out our article on dollar cost averaging here.

Active vs. Passive Investing

Answer: D

“Active investing involves a fund manager who actively researches and selects individual stocks or securities in an attempt to outperform the market, while passive investing involves tracking a market index without active stock selection.”

Active investing involves a fund manager who actively researches and selects individual stocks or securities in an attempt to outperform the broader market. This strategy requires extensive analysis and frequent trading, which often results in higher fees compared to passive investing. In contrast, passive investing involves tracking a market index without active stock selection. Passive investors aim to match the performance of a benchmark index, such as the S&P 500, rather than trying to beat it. Passive investing strategies, often implemented through index funds or ETFs, generally have lower costs and fees since they do not require the same level of research and trading activity as active management. However, passive investing can still be riskier than active investing if the benchmark index is volatile. The choice between active and passive investing often comes down to an investor's goals, risk tolerance, and willingness to pay higher fees in pursuit of potentially higher returns.

If you’d like more info on these two different investing strategies, check out our article here.

Reinvestment Risk

Answer: D

“Reinvestment risk is the potential risk where future proceeds will need to be reinvested at a lower interest rate compared to the original yield.”

Reinvestment risk is primarily attributed to bonds, certificates of deposit, and other fixed income instruments. The risk centers around the idea that returns on investments will be lesser at the time of reinvestment compared to the initial investment. For example, interest rates are sitting at a decades long high but the Fed’s potential to lower interest rates this year likely means interest rates will be lower for any fixed income instrument that is offered after the first rate cut.