Sarah, a 35-year-old Canadian, recently inherited $100,000. She wants to use this money to save for a down payment on a house in 5-7 years and also contribute to her retirement over the long term (25+ years). She is comfortable with moderate market fluctuations for her long-term goals but wants to minimize risk for her down payment savings. Which of the following asset allocation strategies is most suitable for Sarah?

Question: Sarah, a 35-year-old Canadian, recently inherited $100,000. She wants to use this money to save for a down payment on a house in 5-7 years and also contribute to her retirement over the long term (25+ years). She is comfortable with moderate market fluctuations for her long-term goals but wants to minimize risk for her down payment savings. Which of the following asset allocation strategies is most suitable for Sarah?

Answer options:

• Allocate 70% to equity funds and 30% to fixed income for all her inherited funds. ✅ Allocate $50,000 to a high-interest savings account for the down payment and $50,000 to a balanced growth portfolio for retirement.
• Invest the entire $100,000 in a diversified portfolio of growth-oriented Canadian equities.
• Allocate 20% to fixed income and 80% to international equities to maximize long-term growth for both goals.

Correct answer: Allocate $50,000 to a high-interest savings account for the down payment and $50,000 to a balanced growth portfolio for retirement.

Explanation: This approach segregates funds based on their distinct time horizons and risk tolerances. The down payment, with its shorter horizon and lower risk tolerance, benefits from capital preservation, while the retirement savings can take on more growth-oriented risk.