Nellie is 25 years old and just starting her retirement savings. Which breakdown of investments would a financial adviser most likely suggest for Nellie at this point in time?
A. 0% high-risk, 20% medium-risk, 80% low-risk
B. 10% high-risk, 20% medium-risk, 70% low-risk
C. 25% high-risk, 30% medium-risk, 45% low-risk
D. 50% high-risk, 35% medium-risk, 15% low-risk
I think a?
I disagree. When a person is young, it's time for some high-risk investments.
What does your text say?
To determine the most appropriate breakdown of investments for Nellie, we need to consider her age and proximity to retirement.
At 25 years old, Nellie has a relatively long time horizon until she retires. This means she can afford to take on more risk in her investment portfolio to potentially earn higher returns.
A common rule of thumb is to subtract an individual's age from 100 to determine the percentage of stocks or higher-risk investments they should hold. The remaining percentage can be allocated to lower-risk assets such as bonds or cash equivalents.
Let's go through each option and calculate the suggested allocation:
A. 0% high-risk, 20% medium-risk, 80% low-risk: This option suggests holding no high-risk investments, which might be too conservative for someone who has several decades until retirement. Thus, this allocation is less likely to be suggested by a financial adviser.
B. 10% high-risk, 20% medium-risk, 70% low-risk: Here, 10% high-risk seems very low given Nellie's age, and the 70% low-risk allocation is quite conservative as well.
C. 25% high-risk, 30% medium-risk, 45% low-risk: This option suggests a slightly more aggressive allocation with 25% in high-risk investments. However, 45% in low-risk investments is still high for someone young and far from retiring.
D. 50% high-risk, 35% medium-risk, 15% low-risk: Option D is allocating 50% to high-risk investments, which is a more appropriate allocation for someone in their mid-20s. The 15% low-risk allocation is also relatively low, which aligns with a longer time horizon.
Given Nellie's age and the desire for growth in her retirement portfolio, option D (50% high-risk, 35% medium-risk, 15% low-risk) is the most likely breakdown of investments that a financial adviser would suggest at this point in time.
The answer would most likely be D. 50% high-risk, 35% medium-risk, 15% low-risk.
Since Nellie is just starting her retirement savings at the age of 25, she has a long investment horizon ahead of her. This means she has more time to recover from potential losses and can afford to take on higher-risk investments that have the potential for higher returns.
Allocating a higher percentage to high-risk investments would allow her to potentially grow her savings at a faster rate. The allocation of 50% high-risk, 35% medium-risk, and 15% low-risk investments provides a balanced approach, capturing opportunities for growth while still having some level of diversification and downside protection.