FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsMedium
A client, age 35, has a moderate risk tolerance and is saving for a down payment on a home within the next 2-3 years. They want to ensure the safety of their principal while also seeking some modest growth. Which of the following investment recommendations is MOST appropriate?
- AA money market fund or short-term bond fund.
- BA diversified portfolio of aggressive growth mutual funds.
- CA balanced portfolio of 60% equities and 40% fixed income.
- DA variable annuity with a guaranteed minimum accumulation benefit.
Show answer & explanationAnswer & explanation
Correct answer: A. A money market fund or short-term bond fund.
For a short-term goal (2-3 years) requiring principal safety and modest growth, low-risk investments like money market funds or short-term bond funds are most appropriate. They offer liquidity and stability, minimizing market risk for near-term needs.
Why the other options are wrong
- B. Aggressive growth funds are too risky for a short-term goal like a home down payment where principal safety is paramount.
- C. A 60/40 equity/fixed income portfolio carries too much equity risk for a 2-3 year timeframe when principal safety is a key objective.
- D. Variable annuities are long-term investment vehicles, often with surrender charges, and are not suitable for a short-term savings goal like a home down payment.
Short-Term Savings Suitability
Investment recommendations for goals within 1-5 years, prioritizing principal preservation and liquidity over aggressive growth.
- Focus on safety and liquidity.
- Avoid high market risk.
- Examples: Money market funds, short-term bonds, CDs.
Memory trick: Safe Harbor for Short-Term Savings