This is the eighth 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 A. Using a mortgage increases the leverage of your home investment. It may increase your expected return (depending on the expected increase in home value over time and mortgage interest rate), but it will certainly increase the volatility in the value of your investment. Mortgages, as debt, will increase the total cost of paying for the home, but will decrease the amount of money required upfront. By tying up less of your money in the home, more money is available for other investments, such as stocks.
Related Article: The Hidden Sources Of Leverage In Your Portfolio
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The correct answer is A. Because of the power of compound interest, saving money early in your career is more important than saving money later in your career. In this case, saving 50% more per year could not make up for waiting 15 years to start saving.
We can use the future value function to calculate how much each investor will have in 30 years.
For Investor A, it is a two-part calculation: first, calculate how much the investor will have after 15 years: = FV(8%, 15, -$10,000, 0, 0) = $271,521. Then, insert this result into the future value function to calculate years 16-30: = FV(8%, 15, 0, -$271,521, 0) = $861,321.
For investor B, it is a more straight-forward calculation: = FV(8%, 15, -$15,000, 0, 0) = $407,282.
Related Article: To Win the Savings Race, Don’t Pace Yourself
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The correct answer is B. One hour per week of “homework” will not generate insights that will beat the market. Professional investors spend their entire workday looking for market-beating opportunities, often with little success.
Related Article: Why Jim Cramer Is Wrong About Doing Your Homework
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The correct answer is C. The precise definition of a large-cap stock varies, but one threshold is $10 billion. There are many, many companies that are smaller than this, which explains why you may get additional diversification benefits from holding a total stock market fund over a large-cap only fund.
Related Article: Should You Invest in the S&P 500 or the Total Stock Market?
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The correct answer is C. The maximum contribution to a Roth IRA in 2019 increased to $6,000 (previously $5,500 in 2018).
Related Article: Annual Contribution Limit Increases for 2019 (401k, 403b, IRA, HSA)
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The correct answer is D. Vanguard Total Stock Market Index Fund (VTSAX) is the largest mutual fund in the world, with $708 billion in assets as of November 2018. The largest actively-managed funds are smaller than VTSAX, including funds such as Fidelity Contrafund ($121 billion in assets), Income Fund of America ($104 billion in assets), and Vanguard Wellington ($101 billion in assets).
Related Article: VTSAX Review: Vanguard Total Stock Market Index Fund
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The correct answer is A. State tax deductions are available to some residents who contribute to their in-state 529 plan. Contribution limits are generally not related to the account owner’s state of residence. No federal tax deduction is available for 529 plans,
Related Article: Saving For College: Introduction to 529 Plans
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The correct answer is A. When you convert a traditional 401(k) to a Roth IRA, the entire converted amount is taxed as ordinary income. No taxes are due if you convert a Roth 401(k) to a Roth IRA.
Related Article: Should You Convert Your 401(k) To A Roth IRA After Residency/Fellowship?
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The correct answer is B. Of the listed answer choices, only buying a put would hedge against a market drop. Buying a call or selling a put would lose money if the market fell. Traders who buy both a call and a put are hoping for market volatility, but do not care if that volatility is up or down.
Related Article: Should You Hedge Your Portfolio Against A Bear Market With Stock Options?
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The correct answer is C. A Roth IRA offers tax-free growth and tax-free withdrawals. However, there is no upfront tax deduction on Roth IRA contributions.
Related Article: What Is The Value Of A Roth IRA?
What do you think? How’d you do on the quiz?
These quizzes are great! They really point out what I know and what I don’t. Very helpful.
Enjoy the quizzes. It looks like a lot of others do, too.
Keep them coming!
Fortunately, they are validating for me although I’m always nervous they will reveal me as an imposter with little knowledge.
A couple comments:
#5. You can contribute $7k to a Roth IRA if you are old like me.
#7. Varies by state but mine actually gives a tax credit, which is much better than a deduction.
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