Suppose you have a defined-contribution pension plan. As you go through your working life, in what order would you choose to have the following portfolio allocations? a. 50% bonds and 50% stocks: (Click to select) Best early in your career Best in the middle of your career Best as you approach retirement . b. 100% bonds and money-market instruments: (Click to select) Best in the middle of your career Best as you approach retirement Best early in your career . c. 100% stocks: (Click to select) Best early in your career Best as you approach retirement Best in the middle of your career . Why?

multiple choice 4

• With a defined-contribution pension plan, your employer bears the risk associated with the asset allocation of the funds, so you do not need to be concerned about the order.

• Early in your working life, investing in stocks makes sense as they generally earn a relatively high rate of return, though they are very risky even over the long term. Mid-career switch exclusively to bonds, then transition to stocks and bonds later.

• Early in your working life, investing in stocks makes sense as they generally earn a relatively high rate of return and are relatively safe when held over the long term. As you approach retirement, you should gradually convert to bonds and more liquid instruments.

• Early in your working life you should stick to safe, liquid instruments while you learn about investing and then gradually build up to a portfolio of stocks as you approach retirement.