FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsMedium
A client, age 30, has a stable job, no dependents, and a high disposable income. Their primary investment objective is long-term capital growth, and they express a willingness to take substantial risks. Which of the following asset allocations would be most suitable for this client?
- A80% equities, 20% fixed income.
- B50% equities, 50% fixed income.
- C100% money market funds.
- D20% equities, 80% fixed income.
Show answer & explanationAnswer & explanation
Correct answer: A. 80% equities, 20% fixed income.
Given the client's young age (30), stable income, long-term growth objective, and high risk tolerance, a portfolio heavily weighted towards equities (stocks) is most suitable. Equities offer the greatest potential for long-term capital growth but come with higher risk, which aligns with the client's profile. A 80/20 split provides substantial equity exposure while retaining a small, conservative fixed-income component for some stability.
Why the other options are wrong
- B. A 50/50 split is more moderate and might be too conservative for a client with high risk tolerance and long-term aggressive growth objectives.
- C. 100% money market funds offer negligible growth potential and are entirely unsuitable for a long-term growth objective.
- D. A 20% equity allocation is very conservative and would likely not meet the client's long-term capital growth objective.
Asset Allocation for Growth
The process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, based on an investor's goals, risk tolerance, and time horizon.
- Equities generally offer higher growth potential but also higher risk.
- Bonds/fixed income offer lower growth but more stability.
- Younger investors with long horizons and high risk tolerance often have higher equity allocations.
Memory trick: Age, growth, risk: more stock, less brick.