QUIZ: HOW SKILLED ARE YOU AT MONEY?By MARY LYNNE DAHL , Certified Financial Planner ™ Retired
September 24, 2021
(SitNews) Ketchikan, Alaska - Your skill at managing money relies largely on your brain’s ability to get information and make rational decisions. The problem, however, is that our brains are not rational. Instead, our brains are emotional, but do have the power to inform, which we assume makes us rational. That assumption is often false. It can and does get in the way of us actually making those rational decisions, especially about money, and this is how we get into trouble with money.
Israeli psychologists Daniel Kahneman and Amos Tversky are recognized in the world of finance as the first professionals in the field of behavioral finance to speak and teach in public about how irrational our brains are on the subject of money. They developed a body of research that since the mid 1970’s has focused on why we make bad financial decisions and how to recognize them, in hopes of correcting them. Below is a quiz you can take to get a better idea of your own money style and how you can avoid making the most common investment mistakes.
1. Your investment portfolio is heavily invested in a stock that has declined in price by 30% from the price that you paid for it when you bought it. Which of the following actions should you take?
2. Your advisor suggests new stocks or mutual funds to replace underperforming stocks and funds that you have had for years. What is your response to her suggestions?
3. Your portfolio is made up of tech funds, health care funds, financial funds and bond funds. Your advisor suggests reducing the size of your investment in the tech fund sector because she believes it has become overpriced and subject to a decline in the near future. What is your reaction to this advice?
4. The stock market goes into a major correction, causing stock prices to drop dramatically in prices, so your portfolio, which holds a large cash position, suffers a major reduction in value. What is the best way to handle this?
5. Your investments gain an average of 15% per year for 2 years, then drop by 20% in year 3 and then rises by 25% in year 4. What is the better of the following two choices to deal with the volatility of these market ups and downs?
6. A financial broadcaster interviews a fund manager who promotes his fund, that he says has a great future and should be part of the portfolio of a smart investor willing to take some risk. What is your reaction to this story about this stock?
7. You inherit a lot of cash money. What do you do now?
8. You have a portfolio of 10 different mutual funds. One of them has risen in value, based on the current share price, by 200% while the rest have risen 50% on average. Which of the following do you do?
9. The stock market suffers a major correction. What is the best course of action to take in order deal with a crash like this?
10. Your uncle leaves you $150,000 cash in his will. Which of these actions is the best choice of these listed below, as to what to do with this inheritance?
Now that you have completed the quiz, make a note of your answers, because they will help you to understand what drives how you handle money and whether or not that is working for you. I will provide the answers in my follow-up to this column. Your answers are clues to how you make financial decisions, invest and what skills you have or need to get in order to do a better job of money. See you for answers in the next column!
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