Summary of General Investment Goals
For the exam, expect several situational questions that require you to make a judgment about an appropriate investment to recommend to a client, and know the risks associated with the investment.
Example Question
Your niece has just graduated from college with a double major in math and computer science. After accepting a job offer from a Silicon Valley Company, she comes to you for advice about investing her signing bonus. She is a smart young woman and she says she wants to start saving for retirement. You tell her that because a bonus is considered earned income, she can use the money to open an IRA. Which of the following asset allocations would be best for the new IRA of your 22-year-old niece:
A. 60% equities, 20% bonds, 20% cashB. 40% equities, 40% Treasury securities, 20% gold C. 50% equities, 30% REITs, 20% bonds D. 80% equities, 20% bonds
Answer: D.
Explanation: Even though equities (stocks) are more volatile than other asset classes, over long periods, they offer the highest returns. Since your niece is just 22 and since she wants to start saving for retirement, the choice with the highest allocation to equities is the best one for her.
Goal
Types of Investment Recommendations
Biggest Risks
Preservation of Capital
• Insured bank CDs• U.S. Treasuries• Money market funds
Current Income
• U.S. Treasuries• Agency bonds (MBSs and CMOs)• Preferred stock• Bond funds• Municipal bonds• REITs
• Interest rate risk• Default/credit risk• Inflation risk• Reinve
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