Chapter 26: Investment Strategy - Individuals Flashcards
Nature of an individual’s liabilities
Most liabilities will be real, but not necessarily linked to price inflation.
E.g. medical and healthcare costs increase above inflation
Typically an individual will match outgo with salary which will also be real.
However, pensioners are on a fixed income, which causes a mismatch.
Term of an individual’s liabilities
Individuals will often have a shorter term outlook than institutions.
There will be periods where income > expenditure.
The term of the assets will not always match the term of the liabilities.
Currency of an individual’s liabilities
Individuals will often have their liabilities denoted in their domestic currency.
Although there may be special reasons for holding other currencies, e.g. plans to retire abroad.
Uncertainty of an individual’s liabilities
Major issue for individuals.
Unexpected events such as redundancy, ill health or a flood can cause problems.
They are a bigger deal for individuals than for institutions as they can represent an entire loss of income or assets.
As a result, it is common for individuals to:
- hold some assets in a liquid form
- use insurance
Future accrual of individuals’ liabilities.
Most individuals will take some account of future plans for expenditure such as:
- house purchase
- children
- retiring
But this will vary from person to person and might depend on financial sophistication.
Expected long-term return from asset classes
Subject to meeting liabilities, many individuals will also aim to maximise their expected return after expenses and tax.
Taxation for individuals
Tax efficiency is important for individuals.
Differences in taxation of individuals may make certain assets attractive to some individuals but not others.
Some investments will be government-encouraged.
Others will exploit tax loopholes.
Size of the assets for individuals
Individuals will be constrained by the size of their free assets.
For most individuals, these are small and individuals will not be in a position to expect much risk.
Individuals’ existing portfolios
Individuals should be careful not to be overexposed to a single asset class.
E.g. a substantial number of individuals are overexposed to the property class - via the house that they live in.
Risk appetite of individuals
Attitudes to risk vary by:
- age
- wealth
- whether the individual has dependants
In general, individuals tend to be risk-averse compared to institutions. Risks can be diversified between and within asset classes.
Objectives of individuals
Individuals have informal (rather than formal ) investments
Objectives are often to:
- provide a high enough income
- while providing enough growth in income for the future
Other investors may have more long-term investment objectives.
Diversification of investments for individuals
Individuals often invest indirectly via collective investment schemes.
As well as giving diversification.
These are often simpler, offer expertise and are tax efficient.
