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Money Matters


By MARY LYNNE DAHL , Certified Financial Planner ™ Retired


October 11, 2021
Monday PM


jpg Money Matters by Mary Lynn Dahl

Mary Lynn Dahl

(SitNews) Ketchikan, Alaska - As promised, the answers to the questions posed are provided below. As you read and think about these answers, keep several things in mind. One is that sometimes there is no perfect answer, and instead only a “best” answer, given the question or situation. Another thing to keep in mind is that if you answered honestly, your answers give you the opportunity to benefit greatly because they will show what you are doing right or wrong. If you do not answer honestly, your benefit will be less because it will not represent how you would actually react to the situation described in the question. Thirdly, the questions represent common money situations faced by a lot of people, so it is likely you will identify with at least some of them and can compare what you would do with what would be most advisable for you to do, in case those are not the same. Finally, remember that the purpose of these questions is to assist you in making better money decisions, not a test on which you should try to score “high”. Be honest with your answers and get as much benefit from considering the questions and answers as possible. Below are the questions, followed by the answers, with explanations for each correct answer.

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?

A. Hold the stock until it gets back up to the price you paid for it, then sell it.
B. Research the stock as if you were going to buy it for the first time and make a choice to hold/buy/sell based on your research.

ANSWER: B. When a stock or fund declines in price per share, it may be that there is a logical reason that you should know about. If that reason indicates that the stock/fund no longer is worth holding, or is, in fact, worth buying more of at a lower price, you have data to help make your decision. Researching the data before deciding what to do is always the best course of action when the question is buy/hold or sell.

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?

A. You decide to keep the underperforming stocks/funds she suggests you sell because you have had them for many years.
B. You discuss the data on these stocks with your advisor and decide to take her advice.

ANSWER: B. Discussions with and advice from your advisor is generally why you pay him or her. If you hold stocks/funds only for emotional reasons, it is hard to make changes that could improve the performance of your investments. It is always good to review a portfolio periodically to determine if anything has changed, like your goals, your risk tolerance or your personal situation. If so, changes may benefit you and you should always be open to a discussion on this subject.

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?

A. You meet with your advisor to consider other sectors in which to diversify.
B. You meet with your advisor and decide to continue with the tech fund sector because you believe that tech is the future.

ANSWER: A. In general, when a sector of an economy is booming and growing rapidly, investors often flock to it with cash, to “get on the gravy train”, so to speak. Sometimes that over-enthusiasm drives up stock prices in a particular sector only based on greed. Once the enthusiasm cools off, or another sector becomes the favorite of a lot of investors, the share prices of the initially favored sector can drop back to a more reasonable price level. By all means, discuss the strategy of selling some of your higher priced shares and reinvest in another sector that shows potential for favorable growth or income. It is often advisable when you do sell shares that are overvalued to sell only part of them, so that you can retain some shares for the diversification that they provide. When you do sell shares at a large gain, as in this example, you are doing what is called “harvesting your gains”, a good strategy in general.

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?

A. You sell out and minimize your losses.
B. You buy more of your funds that lost the most value.
C. You buy more of your funds that lost the least value.
D. You do nothing.

ANSWER: B. This is definitely counter-intuitive, but it is a solid strategy used by the most disciplined and successful investors. Consider this: The funds that lost the most are now “underperformers” and will be far less expensive than others, representing potential for greater gains in the long term when the market recovers and share prices rise again. Your first question should be to ask or research why one sector or category of stocks lost more value than the others. If the entire sector lost 35% in share price, for example, but your funds only dropped in share price by 25%, you know that the funds you hold in that sector did better than their peers, which is positive. Then, determine why one sector declined in share price so much more than other sectors, because the reason for the share price decline may be temporary. If you intend to stay invested in the same sectors as prior to the market correction, buying more in the sector that has the lowest prices does make for better long-term gains, according to a lot of market research. The reason is that this year’s best sector is often not next year’s best sector, and this year’s worst sector may easily become next year’s best sector. Market data shows dramatic switches of best performing sectors of the US economy from year to year, so the patient investor with good quality funds in differing sectors tends to do better over the longer term, on average. It takes patience and discipline, something in short supply, but it produces better long-term investment results. Getting this strategy right is more challenging to achieve than it sounds on paper, simply because when your portfolio shows a sharp decline in value, it creates an emotional response of loss, which can overwhelm your rational decision-making ability. This is why so many successful investors do rely on objective professional advice, especially when the market is volatile or on a downward trend.

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?

A. You get out of the market and put all of your invested dollars in cash, to preserve the value of what you have already accumulated.
B. The market is sometimes volatile so you stick with the plan that you have in place rather than make any changes.

ANSWER: B. The market can be very volatile at times, but it can also quiet down and become somewhat boring. The most successful investors have a plan, usually in writing, that outlines the strategies being used, based the goals, risks involved and personal situation of each investor. If you are smart enough to have a plan, you are smart enough to know to stick with it. That does not preclude you from making changes that are genuinely beneficial or needed if the situation or market conditions change, but having an overall plan in the first place is paramount to being successful with investments. Getting out of the market when it becomes dicey is an indication that you probably should not be an investor in the first place, because it is an emotional reaction based on fear and greed. Neither are good qualities to have if you want to invest wisely and achieve the best results possible.

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?

A. You are interested in the potential of this fund and decide to take a chance on it with about 5% of your portfolio money.
B. You do not buy any of this stock because you believe that a stock should be valued based on more than its potential to perform well in the future.
C. You buy some of this stock because you believe that this is a trusted news source for identifying hot new stocks.

ANSWER: B. Acting on free advice from anyone who has a conflict of interest, such as a fund manager or broker being paid a commission for selling shares is a mistake made all of the time. The best way to select a fund is to get the data, either from an advisor who qualifies as a fiduciary (ask him or her if s/he is a fiduciary) or on your own, to allow you to determine the potential of any mutual fund or exchange-traded fund. The data you need objective and unbiased. It is readily available at most public libraries and online, published by Morningstar, to show the history of the fund, the ratings (also objective and unbiased), the risk levels, the type of fund by category and size, the track record of earnings, dividends, the fund management style, the expenses and the long-term track records of performance on thousands of funds. The last person to trust is someone who has something to gain from selling you shares in their fund. Advisors who are fiduciaries are legally required to give you objective, unbiased advice on funds and other kinds of securities, so go with the fiduciary advice when selecting funds for your own investment portfolio. The media is not a trusted and unbiased source of investment advice, and investing is not a game of chance, so look at the data before determine whether or not a fund has potential for good long-term performance.

7. You inherit a lot of cash money. What do you do now?

a. You buy stocks that your friends have told you have made the most money for them.
b. You pay off all of your debts and buy bonds with the remaining balance.
c. You set up a diversified portfolio of funds in different categories and risk levels because you believe that it is the safest way to invest.
d. You buy a new house and put the remaining cash in the bank.

ANSWER: C. This answer is the best choice of the 4 choices available in this list, but the real answer would be to get advice and set up a plan to invest some or perhaps all of the inheritance in a diversified portfolio based on an asset allocation strategy designed specifically for you, and pay off any high interest debts if you have them. However, it is not always a good strategy to pay cash for a house or even pay off a low-rate mortgage, depending on your age, income from wages and personal situation. Another issue with automatically opting to pay off all of your debts is that you may do that but soon realize that the problem is that you overspend and now have accumulated a similar amount of new debt, not solving the debt problem at all. A financial plan should not only help you invest wisely but also identify budgetary issues that led you to debt in the first place. It should help you to develop a way to stay out of debt by taking control of your spending, sort of like losing weight by setting up a sensible, sustainable eating plan (not a diet). We all have to eat and that’s why diets do not work; likewise, we all have to spend money, which is why you need a plan on how to spend rather than how not to spend. Again, the key is discipline and focus on the goal. Having a plan makes it easier to focus on] and reach those goals.

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?

A. Sell the fund that has risen 200% in order to realize the gains.
B. Sell half of the fund and buy another fund in a different category with the gains.
C. Hold the fund because it is your best performer and will continue to outperform the other funds.

ANSWER: B. This one is easy. If you are faced with this situation, congratulations! You probably want to keep that superior fund and should do so, but if you harvest the gain, you can buy more shares in the other 9 funds to keep the allocation as close to equal as possible. If it is up 200%, you simply sell the shares that represent the gain over the price per share that you originally paid. This is called “rebalancing” and is very effective as a strategy for getting slightly better performance from a long-term portfolio over time. Most investors who use this strategy have a system on how often or when they will rebalance their portfolio back to the original percentages in each fund or category. It is pretty straightforward and unemotional and it is predictable a good strategy, according to all of the studies done on rebalancing. My preference is to rebalance annually, but it can be done more often if desired.

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?

A. Make no changes in your portfolio because your goals have not changed.
B. Make significant changes in your portfolio to guard against future stock market corrections and crashes.

ANSWER: A. If your goals have not changed, what changes, exactly, could you make to guard against future stock market corrections and crashes? If you are using an investment strategy based on your own personal profile, your goals will not change just because the market is volatile or suffers a crash. Your plan, if you have one, should have a contingency for dealing with market volatility, and that is your protection against crashes and sharp corrections. Studies show that making changes in reaction to market crashes are almost always a mistake, primarily because those changes usually involve selling shares of all or part of a portfolio, then not going back into the market prior to when it recovers. The selling is too late and the return to investing is likewise too late, and the results are usually very poor performance. It amounts to buying high and selling low, which as we all know, is the recipe for investment failure. Additionally, market corrections and even market crashes are relatively short-lived, so as usual, the patient investor who may appear to be slower on the race track will end up being the winner in the end. Patience really does pay when it comes to investing in stocks and stock funds or exchange traded funds.

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?

A. Add it to your IRA in order to avoid paying tax on it.
B. Pay off the mortgage on your house.
C. Pay off your credit cards and invest the remainder.
D. Purchase a guaranteed annuity from your insurance agent.

ANSWER: C. Adding that much money to an IRA sounds pretty smart, but you cannot put that much into an IRA in one deposit because IRS rules limit the amounts you can deposit each year. So that leaves paying off your mortgage, credit cards or buying a guaranteed annuity. Paying off a mortgage might be smart if you have no other debts and are retiring or already retired, but if not, with interest rates as low as they currently are, having a low-rate mortgage is probably ok for most people. Paying off your credit card debt is a better idea, if you also make sure you develop a plan to only use those credit cards for purchases you can pay off every month, in full. A guaranteed annuity is a very expensive way to get a dismally low interest rate on a complicated, long- term savings plan that is managed by the insurance company for the benefit of the insurance company and which has lots of fees, some of which are hard to spot because insurance annuities are so complex. Some are very risky as well, so unless you can get one that offers competitive rates of interest for a 3-to-5-year period with no selling commissions to an agent and no fees to cancel, put your inherited money in a bank CD or conservative investments as part of a financial plan.

I hope this little exercise was helpful and gave you significant insights into how well you do Money. Stay tuned in to read about financial topics for real people who want to make better decisions about Money Matters.



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©2021 Mary Lynne Dahl, CFP®

Mary Lynne Dahl is a retired Certified Financial Planner  TM . She is a partner and founder of Otter Creek Partners, a fee-only financial planning and investment advisor firm in Alaska. These articles are generic in nature and are accepted general guidelines for investment or financial planning and are intended for educational and financial literacy purposes only.  

Mary Lynn Dahl can be reached at


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