NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesMedium
An investment adviser is performing a portfolio review for a client who is 5 years from retirement. The client's portfolio is currently heavily weighted towards growth stocks. To mitigate risk as they approach retirement, the adviser recommends a gradual shift towards more conservative investments. What is this strategy commonly referred to as?
- ARebalancing.
- BTactical asset allocation.
- CBuy and hold.
- DGlide path strategy.
Show answer & explanationAnswer & explanation
Correct answer: D. Glide path strategy.
A glide path strategy is a systematic approach to asset allocation that gradually shifts a portfolio from more aggressive to more conservative investments as an investor approaches a specific target date, such as retirement. This aligns with the adviser's recommendation.
Why the other options are wrong
- A. Rebalancing restores a portfolio to its original target asset allocation, but doesn't necessarily involve a systematic shift in the target allocation itself as retirement approaches.
- B. Tactical asset allocation involves short-term deviations from strategic asset allocation based on market outlook, not a systematic long-term shift towards conservatism.
- C. Buy and hold involves minimal adjustments and doesn't account for a systematic shift in risk profile over time.
Glide Path Strategy
An asset allocation strategy, often used in target-date funds, where the portfolio's asset mix automatically becomes more conservative as the investor approaches a specific target date, such as retirement.
- Systematically reduces risk over time.
- Shifts from higher equity exposure to higher fixed income exposure.
- Aims to protect accumulated capital as the target date nears.
Memory trick: Glide path: Smooth descent to retirement.