NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client, a recent college graduate with limited savings, wants to start investing for retirement. They are comfortable with moderate risk and want an investment that automatically adjusts its asset allocation over time, becoming more conservative as they approach retirement. Which investment vehicle is most suitable for this client?
- ASector-specific ETFs.
- BIndividual stocks.
- CTarget-date fund.
- DFixed annuity.
Show answer & explanationAnswer & explanation
Correct answer: C. Target-date fund.
A target-date fund is designed to automatically adjust its asset allocation over time, gradually shifting from a more aggressive (higher equity) mix to a more conservative (higher fixed income) mix as the investor approaches the target retirement date, making it suitable for a young investor who wants an automated, age-appropriate strategy.
Why the other options are wrong
- A. Sector-specific ETFs are concentrated and carry higher risk, not suitable for a broad retirement strategy with moderate risk and automatic adjustment.
- B. Individual stocks require active management and do not automatically adjust risk, unsuitable for an inexperienced investor wanting an automated solution.
- D. A fixed annuity offers guaranteed income but is typically used closer to retirement and does not offer growth potential or automatic asset allocation adjustment for a young investor.
Target-Date Fund
A mutual fund that automatically adjusts its asset allocation over time, becoming more conservative as the 'target date' (typically retirement) approaches. It provides a diversified, professionally managed portfolio.
- Asset allocation adjusts automatically (glide path).
- Named for a specific retirement year (e.g., 2050 Fund).
- Offers diversification and professional management.
- Suitable for hands-off investors.
Memory trick: Target-date fund: Set it and forget it, for your retirement you won't regret it!