Chapter 26: Investment Strategy - Individuals

Question 1

Nature of an individual’s liabilities

Answer 1

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.

Question 2

Term of an individual’s liabilities

Answer 2

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.

Question 3

Currency of an individual’s liabilities

Answer 3

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.

Question 4

Uncertainty of an individual’s liabilities

Answer 4

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

Question 5

Future accrual of individuals’ liabilities.

Answer 5

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.

Question 6

Expected long-term return from asset classes

Answer 6

Subject to meeting liabilities, many individuals will also aim to maximise their expected return after expenses and tax.

Question 7

Taxation for individuals

Answer 7

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.

Question 8

Size of the assets for individuals

Answer 8

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.

Question 9

Individuals’ existing portfolios

Answer 9

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.

Question 10

Risk appetite of individuals

Answer 10

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.

Question 11

Objectives of individuals

Answer 11

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.

Question 12

Diversification of investments for individuals

Answer 12

Individuals often invest indirectly via collective investment schemes.
As well as giving diversification.
These are often simpler, offer expertise and are tax efficient.