Chapter 9 – Investment advice process

Question 1

Why is three monthly volatility a relatively unimportant measure of risk for investment strategies with a 20 year time horizon?

Answer 1

The longer an investor can hold onto volatile investments, such as shares or property, the greater is the likelihood that they can ride out cyclical or short term downturns.

Question 2

Why is it a good idea for investors to keep some of the investment portfolio in a liquid, easily accessible form?

Answer 2

There are two reasons why liquidity in a portfolio can be advantages:

1 – the capital may have unexpected needs for cash, which could result in serious capital loss if market prices are low.

2 – it enables clients to take opportunities for adding to holdings at times of distress or panic selling.

Question 3

If a client is saving for retirement in 15 years time, explain why they are more likely to have a higher portion of their portfolio in equities that is short dated gilts

Answer 3

This Is a relatively long time horizon and there is no mention of liquidity requirements, So it’s likely the client will be willing to tolerate a medium or high level of risk in the portfolio. In this case, equity is a more appropriate investment than short-term gilts.