Chapter 26: Investment strategy - Individuals Flashcards

1
Q

6 Main factors an individual should consider in making investment decisions

A
  • investment constraints
  • practical considerations
  • risks arising from the variability of market values
  • returns from different asset classes
  • cashflow requirements
  • characteristics of their assets / liabilities
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2
Q

Characteristics of individual’s investments and liabilities

A

Usually individual’s liabilities are predominantly real and domestic, so real domestic assets are preferable.

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3
Q

What do investor cashflow requirements concern?

A

The individual should consider the period when their asset proceeds are required, ie when the total expenditure exceeds their income.
They should also determine the extent to which they want their investments to provide income as opposed to capital gains.

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4
Q

Variability of market values

A

Stability of values should not be a major factor for long-term investment, however the short-term horizon of many individuals can make stability of asset values seem important.

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5
Q

Returns from different asset classes

A

The best value investments are probably those that have specific tax advantages; it may also be necessary to consider any “feel-good” factors

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6
Q

3 Investment constraints to consider for individual investment strategy

A

Investment is constrained by the level of risk that an individual can take on, which may depend on :

  • the level of excess assets of the individual, as these afford investment freedom
  • the uncertainty of future income and outgo (cashflow matching) - individuals should ensure that they have sufficient liquid assets to meet fluctuations in day-to-day expenditure; having adequate insurance will help to ensure that emergency funds don’t need to be too big.
  • the risk appetite of the investor.
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7
Q

3 Practical considerations when considering individual direct investment strategy

A
  • the level of assets being too low to permit direct investment in some asset classes - the investor should ensure that there is adequate diversification overall
  • the relatively high expenses incurred when investing small amounts
  • a likely lack of investment expertise and information compared with professional investors
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8
Q

4 Easily-overlooked forms of investment

A
  • being a member of a pension scheme (individual or occupational)
  • owning your own home
  • an endowment assurance taken out to repay an interest-only mortgage
  • money deposited in a bank
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9
Q

3 Main considerations when considering a personal investor’s financial position

A
  • existing assets
  • future income
  • future spending
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10
Q

Selecting assets that are a good value involve allowing for: (2)

A
  • the expenses of dealing in the asset

- the individual’s tax situation

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11
Q

Lifestyle factors influencing risk appetite (3)

A
  • age (older people are more risk averse)
  • wealth (richer people are more aggressive investors)
  • dependents (more dependents => more cautious)
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12
Q

High levels of future income & expenditure UNCERTAINTY will lead to a need for more: (2)

A
  • liquid assets

- insurance

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