FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsEasy
A client, age 32, is self-employed and plans to purchase a home within the next 2-3 years. They have saved a substantial down payment and want to invest it with minimal risk of capital loss, prioritizing liquidity and safety. Which investment recommendation is most appropriate?
- AA diversified portfolio of growth stocks
- BA variable annuity with a guaranteed minimum accumulation benefit
- CA long-term municipal bond fund
- DA money market fund
Show answer & explanationAnswer & explanation
Correct answer: D. A money market fund
For a short-term goal (2-3 years) with a high priority on capital preservation and liquidity, a money market fund is the most suitable option. It offers stability and easy access to funds, unlike the other options which carry more risk or are less liquid.
Why the other options are wrong
- A. Growth stocks are too volatile for a short-term goal with a low-risk tolerance.
- B. Variable annuities are long-term, tax-deferred investments, unsuitable for a short-term, liquid savings goal.
- C. Long-term bond funds carry interest rate risk and may not provide the necessary capital preservation over a short period.
Short-Term, Low-Risk Suitability
For short-term goals (under 5 years) requiring capital preservation and liquidity, low-risk investments like money market funds or CDs are appropriate.
- Time horizon is short (under 5 years).
- Primary goal is capital preservation.
- Liquidity is important.
- Low-risk investments are preferred.
Memory trick: Home down payments need Money Market safety and speed.