School will soon be in session, so I thought it would be helpful to present a remedial investment quiz you can quickly take to determine your investment chops. When I am referencing large stocks, think about the Standard & Poor's 500, a basket of big companies from different industries. Indicate whether each of the following is true or false:
1[a]If Romney is elected, I am strapping my dog onto the roof of my car and driving to Canada; or,
1[b]If Obama is elected, I'm taking the next plane to Kenya to find the hospital in which he was born.
False and false. Extreme reactions to current events will cost you a bunch of money. There are certainly things to do in anticipation of tax law changes depending on who gets elected, but no one can give you an accurate picture of what the deficit or tax rates will be in 30 years. Be an incrementalist, not an extremist.
One of our physician clients has come in every year for 15 years talking about how her income is going to drop. It hasn't yet. But it may eventually -- when she retires. In the meantime, she has worried herself into not spending on things that would enrich her life because she is so concerned about what has yet to occur. If you look at your own life, especially over the last 10 years, are there good and bad things that happened that you could not have predicted? You can prepare for some of life's events but can't control many of them.
2I can buy safe investments that pay 6 percent.
False. You can't. You really can't. If 10-year government bonds are paying less than 2 percent, you cannot find a safe, guaranteed investment that will pay you more. This means investments promising higher returns are not as safe as they may seem. Show me an investment that provides a high guaranteed rate of return combined with stock market returns and I'll show you an investment that has pages of fine print and is way more complicated than it appears. There is never something for nothing. Never.
3An investor should get stock market returns when large stocks are going up and get bank account returns when stocks are falling.
False. Over time, you will earn more investing in stocks than saving the money in bank accounts. The problem is you don't know when this will happen. That means there will be months or years where you could lose money. Practice portion control with your investing. Rather than trying to grab every nickel on the way up, stay diversified and keep peeling money out of strong areas and moving it into weaker ones.
4The market is at a four-year high, so my returns in the future should be better than if I had invested in the market when it tanked in 2008 and 2009.
False. As markets go up, expected future returns are smaller. Future returns in their most simple form are based on two things -- price paid for an investment and price for which it is sold. If I bought stocks when the S&P 500 was at 10,000 and you waited to buy them until the S&P was at 14,000, I will have a 40 percent better return than you (if we sell at the same time).
One of our clients with a very long time horizon calls us to get him out of stocks when markets are falling. He also wants to add more to stocks once markets have rebounded. He is a brilliant guy, so his justifications for his panic always seem well-reasoned. They just happen to act against his self-interest. If you see yourself in this situation, you may want to figure out how you can divorce yourself from the investment process and turn it over to someone you trust (and then leave them alone!) or buy your own basket of index funds.
If you answered "True" to more than two of these statements, your next investment should be in an investment book.
Spend your life wisely.
Ross Levin is the founding principal of Accredited Investors Inc. in Edina. He is a certified financial planner and author of "The Wealth Management Index." His Gains & Losses column appears on the last Sunday of the month. His e-mail is email@example.com.