Suitability Question

If a couple wants to park their house proceeds temporarily to buy a new home and will close in 6 months, the they will most likely invest their money in

  1. 10% equity and 90% money-market
  2. 75% money-market and 25% Treasury bills

My choice is (2) for liquidity, but somehow the answer said (1). There is no further explanation and I am not getting why 10% equity is a must. I can see the reason invested in the money-market for liquidity. Please help. Thanks.

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Hi @A11! Good to talk to you again.

This is a tough one. Was this an Achievable question, or from another source?

Cash needed for short term obligations (e.g. buying a house in 6 months) needs to be kept in safe investments. A money market is a debt security set to mature in 1 year or less. Money market funds tend to be a good place to park money, especially if it must be used for something important soon (like buying a house). The investor doesn’t want to expose themselves to risky investments, as significant short term losses might lead to them losing out on the house. The market can take a turn for the worse quickly - March 2020 is a good example of that.

Both answers are incredibly close. However, I would side with you, as answer choice #2 is basically 100% money market (T-bills are money market securities). Unless it’s clear the investor has some “wiggle room” with the house proceeds, they should keep close to 100% in very safe investments. With that being said, let’s assume the question states the couple sells their house and clears $400,000. Additionally, they plan on spending $300,000 for the down payment on the new house. The argument could certainly be made for answer choice (1) given the $100,000 “wiggle room.” Even if the market fell and significantly impacted the equity position, it wouldn’t have a huge impact on the overall portfolio (given it’s only 10%). However, I don’t get the sense this was in the question.

Bottom line - I agree with you and am not sure why a recommendation into 10% equity is being made.


It’s a STC question, but it didn’t make sense of reserving 10% equity. If the money coming out from sales proceeds, I will presume the couple have some reserve in their savings already. It just does not make sense of acquiring a 10% equity for holding the proceeds temporarily. In case the treasury securities are not T-bills in choice (2), but just treasury debts, then I will think choice (1) makes more sense. Am I right? :smiley:

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Yes, I agree. If the T-bills were instead 30 years Treasury bonds, then it wouldn’t make sense to allocate 25% of the portfolio to a long term security. If interest rates were to rise, their market price could fall dramatically. They would be required to sell the bond in 6 months, potentially at a very low price. Big risk!

Allocating home sales proceeds to stocks (equity) or long terms bonds isn’t a good idea, but it would be better to go with the one with a lower allocation into the unsuitable product. 10% allocation to equity would be better than a 25% allocation to long term bonds.


Thanks for clarification. I agree 100%