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?
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What is appreciation or capital growth in investments?
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What is purchasing power stability, and why is it crucial in investment planning?
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What are some factors that investors should consider when evaluating purchasing power stability?
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Why is it essential for investments to be approved by law?
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What is the primary benefit of diversifying investments by industry?
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Why is it important for investors to consider their personal and family considerations when evaluating purchasing power stability?
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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
Taxation / Tax Implication
- Tax is a compulsory fee that citizens must pay to the government
- Different investments have different tax rates
- Consider income tax implications to secure a high net after-tax return
Additional Investment Considerations
- Diversification of assets can reduce losses
- Consider the economic and industrial trends before choosing investment types
- Ensure minimum liquidity to meet emergencies
- Consider stability of monetary income
- Forecast securities that will appreciate in value
- Consider purchasing power stability of future funds
- Ensure investments are approved by law
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Description
Understand the concept of inflation rate and its impact on investments. Learn how to calculate the inflation rate and what makes a good investment.