Final answer:
The correct answer to the student's question is option (a), which defines the Multiple Portfolio Approach as dividing money into multiple 5-year buckets, with investments chosen based on the appropriate level of risk for each time period. This approach helps manage investment risks by diversifying assets across different time horizons.
Step-by-step explanation:
Understanding the Multiple Portfolio Approach in Investing
When considering how to manage investments for the future, it's crucial to not only look at individual assets like stocks, bonds, and mutual funds, but also the strategy used to allocate resources across these investments. In the context of the question posed, the Multiple Portfolio Approach typically refers to a method of diversifying investment across different time horizons - a technique often used to manage risk and provide for future needs.
The correct approach, as stated in option (a), divides money into multiple 5-year buckets and funds each bucket with appropriately safe/risky investments. This strategy is based on the principle that investments allocated for long-term goals can be associated with higher risk and potentially higher returns (such as stocks), while money that might be needed in the short-term should be invested in safer assets (like bonds or cash equivalents).
This approach allows individuals to plan out their financial needs over different periods, ensuring that assets are available when needed, without exposing short-term funds to unnecessary risk. Option (b) is incorrect because placing riskiest assets in the first 5-year bucket would expose the investor to significant short-term losses. Option (c) misunderstands the approach as it is about risk management rather than spending control. Lastly, option (d) describes diversification across different brokers, which is not inherently related to the time-based strategy of the Multiple Portfolio Approach itself.
Indeed, a diversified portfolio can mitigate risk by spreading investments across a variety of financial assets and sectors, aligning with the old adage, "Don't put all your eggs in one basket." Despite the benefits of a diversified portfolio, it does not guarantee economic success; it merely reduces the risk exposure from potential market fluctuations. Investment always carries some level of risk, and diversification is one of the key strategies employed to manage this risk.