NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
A client, aged 62, is receiving Social Security benefits and wishes to maximize their spendable income while preserving capital. They have a moderate risk tolerance and are concerned about inflation eroding their purchasing power. Which of the following investment strategies would be most appropriate for this client?
- AA diversified portfolio blending high-quality dividend stocks, inflation-protected securities, and short-duration bonds.
- BA portfolio heavily weighted towards high-growth equities.
- CA strategy focused on aggressive options trading and leveraged ETFs.
- DA portfolio solely invested in long-term corporate bonds.
Show answer & explanationAnswer & explanation
Correct answer: A. A diversified portfolio blending high-quality dividend stocks, inflation-protected securities, and short-duration bonds.
For a client seeking to maximize spendable income, preserve capital, and protect against inflation with a moderate risk tolerance, a diversified portfolio including dividend stocks, inflation-protected securities, and short-duration bonds is most appropriate. This blend offers income, inflation protection, and lower interest rate risk.
Why the other options are wrong
- B. High-growth equities offer little income and significant capital risk, unsuitable for capital preservation.
- C. Aggressive options trading and leveraged ETFs are high-risk strategies unsuitable for capital preservation and moderate risk tolerance.
- D. Long-term corporate bonds carry significant interest rate risk and may not offer sufficient inflation protection or income for spendable income goals.
Income & Capital Preservation
An investment objective focused on generating a steady stream of income while protecting the original investment principal from loss.
- Often suitable for retirees or those needing regular cash flow.
- Prioritizes stability over aggressive growth.
- Typically involves lower-risk assets like bonds, dividend stocks, and money market instruments.
Memory trick: Retirees need a 'SAFE' income stream: Stable, Accessible, Funded, and Enduring.