A client, age 65, is retired and has a significant pension providing a stable income. They also have a substantial inheritance and wish to invest a portion of it to provide additional income and potential growth, while maintaining a moderate risk tolerance. Which of the following investment options is MOST suitable?
- AA diversified portfolio consisting of dividend-paying large-cap stocks and high-quality corporate bond funds.
- BA portfolio composed entirely of aggressive growth equity mutual funds.
- CA portfolio exclusively of U.S. Treasury bills.
- DA non-traded direct participation program (DPP) focused on real estate development.
Show answer & explanationAnswer & explanation
Correct answer: A. A diversified portfolio consisting of dividend-paying large-cap stocks and high-quality corporate bond funds.
The client is retired with a stable pension, has a substantial sum to invest, wants additional income and growth, and has a moderate risk tolerance. A diversified portfolio of dividend-paying large-cap stocks (for growth and income) and high-quality corporate bond funds (for income and stability) is highly suitable. Aggressive growth funds are too risky. Non-traded DPPs are illiquid and carry high risk, unsuitable for a moderate risk tolerance. U.S. Treasury bills are too conservative and offer minimal growth potential, not meeting the 'potential growth' objective.
Why the other options are wrong
- B. Aggressive growth funds are too volatile and risky for a retired client with moderate risk tolerance seeking additional income and growth.
- C. U.S. Treasury bills are very safe but offer very low returns and no growth potential, not meeting the client's desire for 'potential growth' and 'additional income' beyond minimal yields.
- D. Non-traded DPPs are illiquid, high-risk, and complex, generally unsuitable for a moderate risk, retired investor.
Retired Income & Growth Suitability (Moderate Risk)
For retired clients with stable income and moderate risk tolerance seeking additional income and growth, suitable investments include a diversified mix of dividend-paying large-cap stocks, high-quality corporate bond funds, and potentially balanced mutual funds.
- Balance income generation with growth potential.
- Maintain diversification to manage risk.
- Avoid highly speculative or illiquid investments.
- Leverage existing stable income for moderate risk-taking.
Memory trick: Pension plus smart investing equals secure retirement with growth.