This is the second of a recurring series of quizzes to test your knowledge on physician personal finance and investing topics. Some people learn best by reading textbooks. Others like listening to lectures in a course format. This series of quizzes is designed for the physician or other high-income professional who learns best by doing questions.
Each quiz will have ten or so questions. To see the answer, click the “Show Answer” button under each question.
No actual CME can be earned with these quizzes, but hopefully you’ll learn something by answering the questions and reading the explanations. Good luck!
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The correct answer is C. According to data from NYU, the annualized return of the S&P 500 from 1978-2017 is 11.5%. While many market observers predict that returns will be lower than this in the future, there are always economic, technical, and geopolitical concerns facing any stock market and economy. It’s also important to remember that a large percentage of stock market returns comes from dividends that are reinvested into the market – using data from Multpl, the return of the S&P 500 from 1978-2017 just from stock price appreciation alone is 8.9%.
Related Post: What Stock Market Return Should You Expect In The Future?
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The correct answer is D. It’s important to remember that not every expense related to a college education is covered as a qualified educational expense under 529 plans. The College Investor has a nice, brief summary of the common expenses that are and aren’t qualified educational expenses. Travel between home and college is one expense that cannot be paid for with 529 withdrawals.
Related Post: Saving For College: Introduction to 529 Plans
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The correct answer is A. Bonds have lower expected returns than stocks, but they also have lower volatility. Therefore, if you are more averse to portfolio losses than the average investor, you should hold more bonds and less stocks.
Related Post: Does Your Asset Allocation Change As You Become Wealthier?
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The correct answer is A. The status quo bias makes us resistant to change, even if it is financially optimal to do so. An example would be our reluctance to switch banks once we have an established relationship with one, even if we could get better interest rates or better service at a different bank. Choice B is an example of risk aversion. Choice C demonstrates the concept of anchoring. Choice D describes a situation of confirmation bias.
Related Post: The Status Quo Bias in Personal Finance and Investing
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The correct answer is D. While it is usually financially optimal to invest rather than pay off student loans, psychological reasons (i.e. a strong aversion to debt) is a great reason to focus on paying off student loans. In many cases (especially after student loan refinancing), the expected return of the stock market can be higher than your student loan interest rate (but don’t forget to account for taxes). Student loans introduce leverage to your investment portfolio, which is another reason to pay them off as soon as possible. If you are going for PSLF, you should not aggressively pay off your student loans, since the remaining balance will eventually be forgiven.
Related Post: Paying Down Student Loans Versus Investing
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The correct answer is A. The Dogs of the Dow strategy is a strategy of investing in the ten stocks with the highest dividend yields. The portfolio gets changed at the end of each year as stocks move in and out of the list. While the strategy has had slightly higher returns than the S&P 500 from 1996-2016, I have many reservations about the strategy.
Related Post: Dogs Of The Dow Review: Is It A Winning Strategy?
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Related Post: Financial Calculations With The Payment (PMT) Function
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The correct answer is C. Capital gains taxes are paid on investment profits. If invested in an ETF or mutual fund, you may pay management fees on all dollars invested. There is a separate tax for dividends. Interest is generally taxed as ordinary income.
Related Post: It’s Not What You Make, It’s What You Keep: Improving Your After-Tax Returns
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The correct answer is B. The primary benefit of municipal bonds are that its returns are exempt from federal taxes. They are also often exempt from state taxes if you live in the state where the municipal bonds are issued. Because of their tax benefits, municipal bonds generally have lower pre-tax returns than corporate bonds. Municipalities do have default risk, while the U.S. Treasury is assumed to have zero default risk. If you purchase municipal bonds, they should not be put in a taxable account in order to receive the tax benefits.
Related Post: Should You Invest In Municipal Bonds?
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The correct answer is D. Historically, small-cap value has had the best returns. While there are many possible reasons for this, the most commonly cited reason is that investors are rewarded for the higher volatility of small cap and value stocks with slightly higher expected returns.
Related Post: IShares Russell Top 200 Growth ETF (IWY): Should You Tilt To Large-Cap Growth?
What do you think? How’d you do on the quiz?
These are fun and educational. I hope you keep doing them.
Thanks WSP! We are so used to learning by doing questions that this feels like a comfortable way to learn!
Love these. They have validated that I’m not a complete financial idiot and a fraud!
I appreciated the spreadsheet for question 7. I would have struggled without it.
BTW to pay that loan off in 3 years (what I usually recommend) would take $75K per year. Probably not realistic for a pediatrician or FP, but doable for most specialists.
I also love this format. What plugin are you using to create the quiz?
Always fun to see where I’m coming up short.
Thanks for the opportuity,
CD
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