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Investment strategy - individuals (Factors affecting the long-term…
Investment strategy - individuals
Characteristics of the liabilities of an individual
Liabilities consist of future spending (including debt repayments)
Mainly real, but not necessarily linked to a standard price inflation index
Mainly denominated in the domestic currency
Both short-term and long-term liabilities
Some uncertainty in amount and/or timing, e.g. health-care costs, having children, buying a house, holidays, death
Characteristics of the assets of an individual
Assets consist of current wealth and future income
Occupational income can be considered a real asset
Pensioner income may be fixed in nature
Income is uncertain, e.g. due to redundancy or ill-health.
Matching an individual's uncertain liabilities
The individual should hold liquid assets or consider using insurance
Factors affecting the long-term investment strategy of an individual
Matching the nature, term, currency and uncertainty of the liabilities
Individual's tax status and tax treatment of the asset
Maximising expected return on investments, net of expenses and tax
High relative expenses when investing small amounts
Not enough assets for direct investment in certain asset classes
Low free assets, which constrains ability to mismatch and take risk
Risk aversion and a dislike of volatility
Diversification, to reduce specific risk
Lack of information/ expertise relative to institutional investors
A need for income to live on vs growth for the future
Investment strategy for retired individuals
Generating sufficient income to live on from their assets
Maintaining that income in real terms
Allowing for sufficient growth of capital
Generating sufficient income to live on in retirement
Annuities
High income yield assets
Periodic redemptions of assets
Periodic sale of low income yielding assets
Avoiding a fall in asset values prior to retirement
switch to less volatile assets as the time of retirement approaches. This is called "lifestyling".
typically switch to bonds, as at retirement it is likely that an annuity will be purchased and this will be backed by bonds. So, bonds are the most appropriate matching asset.