Chapter 26: Investment strategy - Individuals

Question 1

6 Main factors an individual should consider in making investment decisions

Answer 1

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

Question 2

Characteristics of their investments and liabilities

Answer 2

Usually their liabilities are predominantly real and domestic, so real domestic assets are preferable.

Question 3

Their cashflow requirements

Answer 3

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.

Question 4

Variability of market values

Answer 4

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.

Question 5

Returns from different asset classes

Answer 5

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

Question 6

3 Investment constraints

Answer 6

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 - 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.

Question 7

3 Practical considerations

Answer 7

• 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

Question 8

4 Easily-overlook forms of investment

Answer 8

• 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

Question 9

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

Answer 9

• existing assets
• future income
• future spending

Question 10

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

Answer 10

• the expenses of dealing in the asset

- the individual’s tax situation

Question 11

Important factors influencing risk appetite (3)

Answer 11

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

Question 12

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

Answer 12

• liquid assets

- insurance