10.4.4. Investment Goals
For the exam, expect situational questions that require you to understand whether the risks associated with an investment are consistent with a customer’s individual goals. The main investment goals you might encounter include:
Capital preservation. This is also sometimes called safety of principal. Customers with this goal want first and foremost to avoid any decline in the value of their investments. Conservative investments such as FDIC-insured bank CDs, U.S. Treasury securities, and money market mutual funds would all be acceptable recommendations. Any type of investment that puts the principal at risk is not acceptable to this type of investor. But with the safety of these investments comes lower returns, and customers should be made aware that their portfolios now face purchasing power risk. In other words, the returns from their investments may not be able to keep up with inflation. This is a longer-term risk, however, and this type of investor may have a reason to avoid short-term dangers to her principal. For example, she may soon need to pay college tuition or make a down payment on a house.
Note: While bank CDs are not traded in the market, and instead are redeemed at par value by the bank, they are not subject to interest rate risk in the way Treasury securities, bonds, and most fixed-income securities are. When interest rates fluctuate, the value of a bank CD remains the same. That means, when interest rates rise, the owner of a CD may be locked into a below-market interest rate. To reduce this form of interest rate risk, a conservative investor can build a CD “ladder” by buying multiple CDs staggered over multiple maturity dates.
Income. Investors whose top priority is income are looking for regular cash returns from their investments. Whether monthly, quarterly, semiannually, or annually, these investors seek investments that offer a predictable cash payout and are relatively stable. Income investors are