A 72-year-old client holds a Traditional IRA worth $500,000 and a Roth IRA worth $200,000. She asks which account to withdraw from first. The answer depends on RMDs, tax brackets, and estate goals -- and the exam expects you to rank the considerations.
You build a portfolio by choosing an asset allocation, then maintaining it. Everything else -- security selection, market timing, rebalancing -- is secondary to that allocation decision.
Strategic asset allocation sets long-term target weights based on your client's risk tolerance, time horizon, and goals. A 60/40 equity-bond split for a moderate-risk retiree is strategic. You revisit it when life circumstances change -- not when markets move.
Tactical asset allocation deviates from those targets temporarily. You overweight an asset class you believe is undervalued, then revert to strategic weights. Tactical is active. Strategic is the anchor.
HIGH-FREQUENCY: When a question describes an adviser "shifting portfolio weights to exploit short-term opportunities," the answer is tactical asset allocation. When it describes "setting a long-term target mix based on client objectives," the answer is strategic.
Common mistakes
- Confusing average cost with average price in DCA. Average cost per share = total dollars invested / total shares purchased. Average price = arithmetic mean of prices. DCA always produces an average cost below the average price. The exam offers the average price as the trap answer.
- Treating 457(b) like a 401(k) for penalties. 457(b) plans never impose the 10% early withdrawal penalty. A question about a 55-year-old government employee withdrawing from a 457(b) -- no penalty. The same withdrawal from a 401(k) or IRA triggers the 10% penalty unless an exception applies.
- Forgetting the wash sale window is 61 days, not 30. The window runs 30 days before the sale, the sale date itself, and 30 days after. Candidates who memorize "30-day rule" miss the before-sale leg. The total blackout period is 61 days.
Bottom line
- Asset allocation is the single biggest driver of long-term returns. Strategic = long-term targets. Tactical = short-term deviations.
- Dollar-cost averaging lowers average cost per share below average price, because fixed dollars buy more shares when prices drop.
- Capital gains: held over 12 months = long-term (0/15/20%). Held 12 months or less = short-term (ordinary rates).
- Wash sale window is 61 days (30 before + sale date + 30 after). The disallowed loss is added to the replacement shares' basis.
Exam shortcut
When a question says "short-term adjustment to exploit market conditions," the answer is tactical allocation. When it says "fixed dollar amount at regular intervals," divide total dollars by total shares -- never average the prices. For retirement plans, remember the penalty exceptions: 457(b) never has the 10% penalty. SIMPLE has a 25% penalty in the first two years. Everything else is 10% before 59 1/2.
The full lesson (about 3,563 words, 24 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C19
- C20
- C21
- C22
- C23
- C24
- C25
- C26
- C27
- C28
- C29
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