A client, age 60, is preparing for retirement within the next five years. They have a moderately conservative risk tolerance and prioritize capital preservation with a desire for current income. Which of the following investment recommendations is MOST suitable for this client?
- AA variable annuity with a focus on aggressive growth subaccounts.
- BA diversified portfolio consisting primarily of investment-grade corporate bonds and dividend-paying utility stocks.
- CA non-traded real estate investment trust (REIT) with a high distribution yield.
- DA portfolio heavily weighted towards high-growth small-cap stocks.
Show answer & explanationAnswer & explanation
Correct answer: B. A diversified portfolio consisting primarily of investment-grade corporate bonds and dividend-paying utility stocks.
The client's profile indicates a near-retirement individual with a moderately conservative risk tolerance, prioritizing capital preservation and current income. Investment-grade corporate bonds offer income and relative safety, while dividend-paying utility stocks provide income and historically stable returns. This aligns well with their objectives. High-growth small-cap stocks are too aggressive. Aggressive growth subaccounts in a variable annuity are also too risky. Non-traded REITs, while offering income, are illiquid and carry higher risks than suitable for a moderately conservative, near-retirement client.
Why the other options are wrong
- A. Aggressive growth subaccounts are inconsistent with a moderately conservative risk tolerance and desire for capital preservation.
- C. Non-traded REITs are illiquid and carry significant risks, generally not suitable for a moderately conservative client focused on capital preservation.
- D. High-growth small-cap stocks are too aggressive for a client prioritizing capital preservation and current income near retirement.
Capital Preservation & Income Suitability
For clients near retirement with a conservative to moderate risk tolerance, prioritizing capital preservation and current income, suitable investments include high-quality bonds, dividend-paying stocks, and money market instruments.
- Focus on stable income generation.
- Prioritize protection of principal.
- Avoid highly volatile or illiquid investments.
- Common for retirees or near-retirees.
Memory trick: Slow and steady income protects your nest egg for retirement.