Do you have market smarts?
Test your investing IQ with this quiz.
Do you have the knowledge to protect your money when things go sour?
Stocks, measured by the Standard & Poor’s 500 index, have tripled since 2009, but the party won’t last forever. They could tank 40% or more or double again.
Take this quiz and decide if you can fathom the world’s wacky ways, and avoid mistakes that could hurt your investments. Answers are down below, but don’t peek.
Quiz:
1. Most recessions are caused by:
❚ A. Corporate corruption
❚ B. Government policies
❚ C. Wars
❚ D. Bad monetary policy
2. True or false: Budget deficits hurt stocks.
3. Stocks usually sour after priceto-earnings ratios are:
❚ A. Low
❚ B. Historically average
❚ C. Way above average
❚ D. It’s a dumb question
4. Bull markets usually begin when:
❚ A. Congress cuts taxes
❚ B. The Federal Reserve cuts interest rates
❚ C. Economic and business expectations sink too low
❚ D. Economic growth resumes
5. To cause a recession, big new negatives would have to knock about what amount off of the global economy?
❚ A. $35 billion
❚ B. $4 trillion
❚ C. $1.5 trillion
❚ D. $650 billion
6. Biggest risk retirement investors face is likely:
❚ A. A future bear market
❚ B. Social Security going bankrupt
❚ C. Steady, safe, secure portfolios
❚ D. Rising interest rates
If you got four or more correct — hurray! You might try timing this bull market’s end. If not, you should set your long-term asset mix correctly (likely mostly inexpensive passive stock funds), take your hands off the steering wheel and let it work for you through good times and bad.
Answers:
1. D. The Federal Reserve can be deadly. Banks borrow at short-term interest rates, lend at long-term rates and profit off the difference. Most recessions start when the Fed, fighting inflation fears, jacks short rates above long ones, killing the incentive for banks to lend. The resulting credit squeeze tanks business.
2. False. People hate deficits and rising debt. But data from an ultra-long history of deficits, surpluses and stock prices show that rising deficits signal periods of bullish stock markets. Forget your political or social views. Trust the data. When deficits rise, stocks regular- ly do wonderfully. Falling deficits and surpluses? Not so much.
3. D. Again, trust the data when it comes to a stock “valuation,” also known as a price-to-earnings ratio, or P/E. It divides stock prices by last year’s corporate earnings. As I detailed in my Oct. 22 column, P/Es predict nothing over subsequent one- to three-year periods (Nor do any other value measure). Every P/E level is followed by one-, two- and three-year periods of perfectly random, similarly high and low returns. Believe it.
4. C. Ancient saying: The market knows. Stocks are forward-looking. They pre-price future realities that society guestimates horribly. Rate and tax cuts may help business. But the trigger is excessive pessimism. Bull markets begin when economies are imploding — just less disastrously than folks first feared — like in 2009 and 2010.
5. B. Think huge! Global GDP is about $80 trillion. The International Monetary Fund estimates 2018 global growth of 4.9%. For a recession, GDP must fall. So you need more than 4.9% of $80 trillion to kill that growth. That’s $4 trillion.
6. C. Most retirees must finance longer lives than currently expected. Perceived “safe” assets like cash and bonds yield too little to provide retirees with decades of adequate income. Avoiding poverty in old age requires “riskier” assets (meaning more volatility). Stocks render the highest liquid long-term returns. Stocks are risky short-term, but not long-term. Bear markets end and interest rates ease, but earning too little over the longterm is irreversible.
Ken Fisher is the founder and executive chairman of Fisher Investments and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.