Inflation Rate and Investment

Questions and Answers

What is the primary step an investor should take before choosing an investment type?

Reviewing economic and industrial trends

What is the main objective of diversification in investment?

To ensure safety of principal and reduce losses

What is liquidity in investments, and how can it be ensured?

Liquidity refers to converting an investment to cash without delay at full market value; it can be ensured by keeping a portion of cash, fixed deposits, and units that are immediately saleable.

Why is income stability important in investment planning?

To ensure regularity of income at a consistent rate, both before and after taxes Signup and view all the answers

What is appreciation or capital growth in investments?

The increase in value of an investment over time, such as growth stocks or property Signup and view all the answers

What is purchasing power stability, and why is it crucial in investment planning?

Purchasing power stability refers to maintaining the value of future funds; it is crucial to ensure that investments keep pace with inflation and maintain their purchasing power. Signup and view all the answers

What are some factors that investors should consider when evaluating purchasing power stability?

The degree of price level inflation, possibilities of gain and loss, and personal and family considerations Signup and view all the answers

Why is it essential for investments to be approved by law?

To ensure legal compliance and freedom from care Signup and view all the answers

What is the primary benefit of diversifying investments by industry?

Reduced risk and potential losses Signup and view all the answers

Why is it important for investors to consider their personal and family considerations when evaluating purchasing power stability?

To ensure that investments align with their personal and family goals Signup and view all the answers

Study Notes

Investment Principles

A good investment must produce a good after-tax income to be considered viable
The investment should generate an interest of 6% or more to beat inflation and produce visible returns

Inflation Rate

Inflation is a continuous rise in prices of goods and services, leading to a decrease in the value of money
The inflation rate is a percentage calculated annually to measure the rise of average prices in the economy
In South Africa, the inflation rate has been around 4% for the past few years
A good investment should have a return on investment higher than the inflation rate

Volatility / Fluctuations on Investment Markets

Volatility refers to the rise and fall of market prices
Low volatility means the investment, market, or economy is stable
Market volatility is associated with investment risk

Investment Planning Factors

Consider the safest possible investment opportunities
Explore opportunities with a history of good returns
Divide investments between different options to minimize risk
Consider the method of calculating interest (e.g., interest, dividends, capital appreciation)
The return on investment should be expressed as the net after-tax income assets

Risk

Risk refers to the possibility of losing money due to unforeseen circumstances
Higher potential return is often associated with higher potential risk
Examples: investing in shares has a higher risk than investing in a fixed deposit, but also promises higher returns

Investment Period / Investment Term

Investment period is the duration of the investment, influencing return on investment
Investments can be short, medium, or long term
Long-term investments (more than a year) generally yield higher returns than short-term investments (one year or less)

Liquidity

Liquidity refers to how quickly and easily an investment can be converted to cash
Cash and some shares on the stock market are considered liquid assets