Try 10 focused CFP® questions on Investment Planning, with answers and explanations, then continue with Securities Prep.
| Field | Detail |
|---|---|
| Exam route | CFP® |
| Issuer | CFP Board |
| Topic area | Investment Planning |
| Blueprint weight | 17% |
| Page purpose | Focused sample questions before returning to mixed practice |
Use this page to isolate Investment Planning for CFP®. Work through the 10 questions first, then review the explanations and return to mixed practice in Securities Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 17% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: Investment Planning
During an annual review, a married couple tells their CFP professional that their diversified retirement portfolio fell 11% in the last quarter. They are 14 years from retirement, keep a separate emergency fund, and do not expect to use this portfolio before retiring. One spouse says, “This proves we are taking too much risk—move everything to cash.” What is the most appropriate next step for the CFP professional?
Best answer: B
What this tests: Investment Planning
Explanation: The best next step is to confirm the couple’s time horizon and liquidity needs before making any allocation change. Short-term market swings are volatility; permanent impairment risk is more about having to sell at depressed prices or facing a lasting loss of capital.
When a client reacts strongly to a recent decline, the CFP professional should first determine whether the issue is temporary market volatility or a genuine risk of permanent impairment. That means revisiting what the assets are for, when they will be needed, and whether any cash-flow or goal changes now require selling into a downturn. In this scenario, the couple appears to have a long time horizon, no planned withdrawals, and separate emergency reserves, so the decline is more consistent with volatility than permanent loss risk. The proper process is to confirm those facts, evaluate whether risk capacity or risk tolerance has changed, and only then recommend, implement, and document any portfolio change. Acting first or educating first skips a client-specific safeguard.
Confirming whether any near-term spending need or goal change exists separates normal volatility from true permanent impairment risk.
Topic: Investment Planning
Marisol and Ben, both 48, already max out their 401(k)s and IRAs. They want to invest $300,000 in a joint taxable account for retirement 15 years away, are high earners, and do not need current income from the portfolio. Their CFP professional is choosing between a broad-market index ETF and an actively managed U.S. stock mutual fund. Which taxation feature is most decisive in favoring the ETF under these facts?
Best answer: B
What this tests: Investment Planning
Explanation: Because the money will be held for many years in a taxable account, the key issue is avoiding unnecessary current tax drag. A broad-market ETF is generally more tax-efficient than an actively managed mutual fund because it is less likely to pass through annual capital gains distributions before the clients sell.
The core concept is tax efficiency in a taxable account. When clients have a long horizon, no need for current income, and have already used available tax-advantaged accounts, the most important vehicle feature is whether it forces taxable gains before they choose to realize them. Broad-market index ETFs typically have lower portfolio turnover and often can manage shareholder redemptions more tax-efficiently, so they tend to distribute fewer capital gains than actively managed mutual funds.
Qualified dividends may be available from either vehicle, a basis step-up is an estate-planning result rather than a vehicle distinction during life, and wash sale rules are not a built-in tax advantage of ETFs.
In a long-term taxable account, the ETF’s main tax advantage is better tax deferral from fewer capital gains distributions.
Topic: Investment Planning
Elena and Victor Park are considering a $100,000 investment in a private real estate fund that permits no redemptions for 6 years. They want all known near-term obligations funded from liquid, non-retirement assets and do not want to borrow. Based on the exhibit, which interpretation is most appropriate?
Exhibit:
Cash and savings: $65,000
Short-term bond fund: $85,000
Taxable stock ETF: $40,000
401(k)s and IRAs: $780,000
Existing private equity fund: $160,000
Net annual cash-flow surplus: $12,000
Emergency reserve target: $30,000
Known cash needs in next 12 months: home down payment $150,000, tuition $36,000, roof replacement $20,000
A. Illiquidity is not acceptable; near-term needs already absorb liquid assets.
B. Illiquidity is acceptable because retirement accounts can cover any gap.
C. Illiquidity is acceptable because current private holdings support another lockup.
D. Illiquidity is acceptable because annual surplus restores liquidity quickly.
Best answer: A
What this tests: Investment Planning
Explanation: The exhibit shows a liquidity shortfall, not a net worth shortfall. Liquid non-retirement assets total $190,000, and even after adding the $12,000 surplus they still fall short of the $206,000 in known 12-month needs; preserving the $30,000 emergency reserve widens the gap.
Illiquidity is acceptable only when the client can meet known near-term obligations and maintain an adequate reserve from liquid assets. Here, Elena and Victor specifically want to cover those needs from liquid, non-retirement assets and avoid borrowing, so the relevant pool is cash, short-term bonds, the taxable ETF, and expected surplus—not retirement accounts or existing private investments.
Because they are already short on liquid resources, adding a 6-year lockup would increase, not solve, their liquidity risk.
Their liquid non-retirement assets plus projected surplus are below known 12-month needs and the reserve target, so a new 6-year lockup is not supported.
Topic: Investment Planning
Monica, 61, plans to retire in 18 months. She will need about $40,000 a year from her taxable brokerage account for the five years between retirement and claiming Social Security at 67. She is in the 32% federal income tax bracket, has an adequate emergency fund, and must also pay her son’s final college bills totaling $50,000 over the next two years. Monica says a 20% market decline in the assets earmarked for these expenses would make her postpone retirement. For the portfolio segment intended to meet these known cash-flow needs, what is the best recommendation?
Best answer: C
What this tests: Investment Planning
Explanation: When a client has known spending needs within a few years, liability matching is usually more important than pursuing higher expected return. A ladder of high-quality municipal bonds aligns cash flows with Monica’s retirement bridge and tuition payments while reducing volatility and improving after-tax income in her taxable account.
The core concept is matching assets to the timing and certainty of liabilities. Monica’s withdrawals begin soon, cover only a five-year bridge period, and include scheduled tuition payments, so the assets assigned to that goal should emphasize predictable cash flow, principal stability, and limited need to sell in a down market. In a taxable account, high-quality municipal bonds can improve after-tax income for a client in a high federal bracket, and a ladder lets maturities arrive when spending is due. That also fits her low risk capacity and her stated concern that a sharp loss could delay retirement. Equity vehicles, even income-oriented ones, still carry market risk and uncertain cash flows. The key takeaway is that near-term required spending is generally best funded with high-quality fixed income rather than equity income strategies.
A maturity-matched municipal bond ladder best fits her near-term spending schedule, taxable account, and low ability to absorb equity volatility.
Topic: Investment Planning
Jordan, 61, plans to retire in 18 months. A single former-employer stock in his taxable account is worth $950,000 and represents 52% of his $1.8 million investment portfolio; his basis is $140,000. Jordan wants to keep the shares because they pay qualified dividends and selling would trigger long-term capital gains tax. After analyzing his plan, the CFP professional determines Jordan will rely on portfolio withdrawals for most retirement income and has limited ability to recover from a major loss. With no sale restrictions, what is the most appropriate next step?
Best answer: A
What this tests: Investment Planning
Explanation: When one stock dominates a near-retirement portfolio, the client’s limited risk capacity can outweigh the tax benefit of continuing to defer capital gains. The best next step is to recommend reducing the position in a planned, tax-aware way rather than letting taxes justify continued concentration.
The core concept is that tax deferral is valuable, but it is not the primary concern when a concentrated position threatens the client’s retirement security. Jordan is close to retirement, expects to depend heavily on portfolio withdrawals, and has more than half of his portfolio tied to one company. That creates significant single-security risk that diversification is meant to reduce. Since the CFP professional has already analyzed the plan and confirmed there are no sale restrictions, the proper next step is to recommend diversification now and then manage the tax impact thoughtfully.
A strategy driven mainly by avoiding current capital gains tax leaves the retirement plan exposed to a potentially much larger loss from one holding.
Jordan’s near-retirement reliance on the portfolio makes concentration risk the priority, so diversification should begin now while managing the tax cost.
Topic: Investment Planning
Dana, 58, plans to roll her 401(k) into an IRA and manage it herself after the initial recommendation. She says she becomes overwhelmed by too many holdings, ignored rebalancing in her 401(k) for years, and twice moved entirely to cash during market declines. She wants moderate long-term growth and already keeps a separate emergency fund. Which investment approach best matches Dana’s situation?
Best answer: C
What this tests: Investment Planning
Explanation: When a client has limited ability or willingness to manage complexity, the strategy should usually be simplified. Dana’s history of ignoring rebalancing and fleeing to cash suggests she is more likely to stick with a one-fund diversified approach than with a portfolio requiring ongoing decisions.
The key concept is matching investment implementation to client capability and behavioral limits, not just to an abstract target allocation. Dana will manage the account herself, becomes overwhelmed by complexity, has already failed to rebalance, and has reacted emotionally to downturns by moving to cash. Those facts point to a simpler structure that reduces the number of decisions she must make over time.
A somewhat more customizable strategy may look efficient on paper, but if the client is unlikely to execute it consistently, the simpler approach is usually the better planning recommendation.
A single diversified asset-allocation fund minimizes ongoing decisions and rebalancing tasks, making it easier for Dana to understand and consistently maintain.
Topic: Investment Planning
Maya, 61, retired last month with $1,200,000 invested. She must withdraw $80,000 per year from the portfolio for living expenses until her pension starts in 3 years. She also plans a $100,000 home remodel in 12 months. Her IPS states that cash needs due within 3 years should come from assets with minimal market volatility, while assets not needed within 3 years may be invested for growth. Which proposed portfolio best matches her required liquidity and withdrawal needs?
Best answer: D
What this tests: Investment Planning
Explanation: The IPS requires an asset-liability match: spending due within 3 years should be funded from liquid, low-volatility holdings. Maya needs $240,000 of withdrawals over 3 years plus a $100,000 remodel, so reserving $340,000 in cash, Treasury bills, and short-term high-quality bonds best fits her liquidity need.
The core concept is matching portfolio liquidity to scheduled withdrawals. Because Maya’s IPS says all cash needs due within 3 years should be insulated from market volatility, the planner should first carve out those known needs and place them in highly liquid, low-duration assets.
Cash, Treasury bills, and short-term high-quality bonds are appropriate for that reserve because they are liquid and have limited price volatility relative to stocks, REITs, or longer-term bonds. The remaining assets can then stay invested for long-term growth. The closest distractor is the balanced-fund approach, but it still exposes required withdrawals to market losses at the wrong time.
It segregates the full $340,000 due within 3 years into liquid, low-volatility assets, matching the IPS liquidity requirement.
Topic: Investment Planning
A CFP professional is helping a client with a 12-year retirement horizon and adequate cash reserves compare two choices: keep the equity allocation in a broadly diversified U.S. stock index fund, or replace it with a single large utility stock because that stock has historically moved less than the market. Which statement best distinguishes the main risk difference between the two choices?
Best answer: D
What this tests: Investment Planning
Explanation: Volatility is about price fluctuation, while permanent impairment risk is about a lasting loss of capital. A diversified index fund can still be bumpy, but spreading exposure across many companies reduces the damage from one business failing or deteriorating.
Volatility is short-term price fluctuation; permanent impairment is a lasting loss of capital because the underlying investment value is damaged. A diversified U.S. stock index fund can decline sharply during market cycles, but for a client with a 12-year horizon and adequate cash reserves, those swings are often temporary mark-to-market changes rather than irreversible losses. Replacing that diversified exposure with a single utility stock may reduce visible day-to-day movement, yet it concentrates company-specific risk. If that company faces regulatory, business, or dividend problems, the client can suffer a lasting loss that diversification would have diluted.
Lower historical volatility does not automatically mean lower planning risk when concentration increases the chance of permanent impairment.
Diversification can leave short-term volatility intact while reducing the chance that one company permanently damages the plan.
Topic: Investment Planning
Marisol, 62, will retire this month. She needs $60,000 a year from her taxable portfolio for the next 6 years until her pension and Social Security begin. A 20% market decline would likely cause her to abandon the plan, but assets not needed for at least 7 years can stay invested for growth. Which action best aligns with sound CFP-level investment planning?
Best answer: A
What this tests: Investment Planning
Explanation: When a client has a defined multi-year spending need and is vulnerable to abandoning the plan after market losses, matching that need with high-quality fixed income is usually most appropriate. A bond ladder supports predictable withdrawals while leaving longer-horizon assets available for equity growth.
The core principle is time-horizon matching. Marisol has a specific 6-year cash-flow need and limited tolerance for equity volatility during that period, so the near-term spending reserve should be placed in vehicles with more predictable cash flows and lower principal volatility. A ladder of high-quality bonds can be structured around her planned withdrawals, reducing sequence-of-returns risk and lowering the chance that she must sell depressed equities to meet living expenses.
Dividend stocks, preferred stock funds, and REIT funds may offer income, but they are still market-sensitive vehicles whose prices and distributions can fall when cash is needed most. For the portion of the portfolio not needed for at least 7 years, diversified equities remain appropriate because that money has a longer recovery horizon. The key takeaway is to fund known short-term liabilities with fixed income, not with equity-income substitutes.
Known near-term withdrawals are better matched to high-quality fixed-income maturities than to equity-income vehicles, which can be volatile and unpredictable.
Topic: Investment Planning
A CFP professional is helping Nora choose between two bond ETFs in a taxable account that will fund tuition in 7 years. Expected inflation is 2.8% annually. The funds have similar credit quality, duration, and liquidity. The taxable bond ETF is expected to earn 5.5% nominal annually, taxed at Nora’s 34% combined marginal rate. The municipal bond ETF is expected to earn 4.2% nominal annually, exempt from those taxes. Which recommendation best aligns with sound return-measure analysis?
Best answer: D
What this tests: Investment Planning
Explanation: For a taxable goal, the right comparison is after-tax return adjusted for inflation. Nora’s taxable bond ETF falls to about 3.63% after tax, while the municipal bond ETF remains 4.2%, so the municipal choice preserves more purchasing power.
The core principle is to compare investments using the return measure that matches the client’s actual outcome. Because this money is in a taxable account and Nora is funding a future spending goal, after-tax real return is the relevant lens.
Using the exact real-return formula, the taxable bond ETF is about 0.81% real after tax, versus about 1.36% for the municipal bond ETF. The closest distractor notices the higher nominal yield but misses that taxes change the client’s purchasing-power result.
The municipal bond ETF keeps the higher after-tax return, and it still leads after adjusting for Nora’s 2.8% inflation assumption.
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