NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client, a 68-year-old retiree, relies solely on their investment portfolio for living expenses. Their primary financial goals are capital preservation and generating a consistent, predictable income stream to cover their monthly expenditures, with minimal exposure to market volatility. Which of the following portfolio strategies would be most suitable for this client?
- AAn aggressive growth portfolio heavily weighted towards small-cap equities.
- BAn income-focused portfolio consisting primarily of high-quality bonds and dividend-paying stocks.
- CA portfolio concentrated in emerging market equities for high growth potential.
- DA tactical asset allocation strategy that frequently shifts between asset classes based on market forecasts.
Show answer & explanationAnswer & explanation
Correct answer: B. An income-focused portfolio consisting primarily of high-quality bonds and dividend-paying stocks.
An income-focused portfolio with a strong emphasis on high-quality bonds and dividend-paying stocks provides consistency, predictability, and capital preservation, which aligns perfectly with a retiree's need for living expenses and low market volatility.
Why the other options are wrong
- A. This strategy is highly volatile and focused on growth, not capital preservation or consistent income.
- C. Emerging market equities are highly volatile and carry significant risk, completely contrary to the client's goals.
- D. Tactical asset allocation involves higher risk due to frequent shifts and market timing, unsuitable for a conservative retiree.
Income-Focused Portfolio
A portfolio strategy designed to generate a consistent and predictable stream of income, often through investments like bonds, dividend stocks, and income-oriented mutual funds, prioritizing current yield over capital appreciation.
- Primary goal: generate regular income.
- Emphasis on capital preservation.
- Lower exposure to market volatility.
- Suitable for retirees or those needing current cash flow.
Memory trick: For a retiree's income, steady and true, high-quality bonds and dividends will see them through.