This essay considers various aspects of individual long-term investments and provides comparative food for thought on issues surrounding the soundness of investments in different options – bonds, funds parking in banks, property guides and commodities like gold, etc.
From the data gathered through field studies, it is evidenced that each kind of investment does carry a certain degree of risks commensurating with returns and capital increases.
It is also seen that in the present climate of economic uncertainties, punctuated with interest rates declines and marked proclivity towards disinvestments, gold, as a commodity offers benefits of capital appreciation, safety, durability and economic resilience, characteristic of the metal as a viable long term investment without, perhaps, its attendant risks. The deliberations do endorse the robustness and business sense of investing in gold transactions as a long-term investment option after careful consideration of relevant data and views put forth by qualified professionals on this interesting subject matter of dissertation study.
In the past time, the most common form of long-term investments by individuals was fixed deposits in banks. Due to the drastic change in the economy and by the introduction of innovative financial instruments the world’s investment outlook underwent a major transformation. People with surplus funds began to invest in shares, stock, bonds, metals, currencies, etc. One way of investment is to purchase various stocks in different industries. The alternate way is to invest in one
single product, i.e., we could either purchase bonds, or invest in various money market accounts, or in real estate. Investment in a diversified portfolio helps in hedging of risks and investors are offered by a consistent and regular return. Diversifying strategy requires time of investigating how much to invest, what are the options to be included in the portfolio, etc. But investing in a single asset does not require much planning and researching but investing in different assets requires a detailed analysis of the attendant risks and returns of all the available investment options before taking a plunge.
- Present a more informed evaluation of long term investment (mainly for 25 years) options to identify the best in the current economy.
- Provide evidence of the performance of different investment options in the past 5 years.
- To get insight into the risk associated with each type of investment.
- To know the benefits associated while investing in each type of investment.
In order to achieve the proposed objectives three questions have been outlined.
Many studies have been conducted to identify the best portfolio to invest. But an investor who likes to invest in a single option requires an appropriate option in the long term. Many studies have been conducted by comparing the investment options like gold, bond, mutual fund, fixed deposit or real estate etc. But few studies are done on long term investment covering bond, gold, bank deposit, foreign currency, and real estate. The variable like bond, gold, bank deposits, foreign currency market and real estate are taken because they are the most common type of investments preferred by the investors in the long run.
Expected result of the study is finding the best individual investment option in the long run from bond, gold, bank deposit, foreign currency market and real estate.
Long term investment decisions are most important as it involves greater risks. Stocks and bonds are the two major investment options. A correlation study between different investment options will provide information relating to the relative movement of investment returns. In case bond investments, the return is guaranteed by the government. (Asset Allocation Decisions. 2009).
As per the perspective of T theory Investment, long term investments are made with the primary goal of creating superior long term investment rate of returns with minimum risk on investment. In this concept, equities are not better for long term purpose as it s fundamentally overvalued and as such while taking long term the value may be diminishing. The present diminishing trend in the stock market after a high peak is clear evidence that support this theory.
In case of investment in tangible assets such as gold and real estate property, it has potential return capability for the next 15 years. In case of short term bonds, better conservative return can be assured. The last century’s data on equity investment shows that the equity investment options are not attractive for long term investment purpose due to the overvalued condition of stock price as a result of higher demand in the market.
The dividend return from equity share investment is not attractive over the year. The motivating factor behind the equity investment decisions is the future benefit that can be attained by selling the shares when price reaches its peak. In order to identify the best investment opportunity, fundamental methods of equity valuation using the P/E criteria have to be carried out together with value build up time factors in the T theory concept. (Laundry 2003).
Many of the financial experts in the past had the view that stock market is the best source than any other source for long term investment purpose. In the periods of 1990, there is greater acceptance of this concept among the long term investors. They supposed their view by pointing out the statistics and formulated theories. But in real-time situations it can see that stock market is not a best investment option for long term purpose. By stating the same supporting theory on stock market investment, economists point out that property would produce the same long term return as stocks. Fundamentally there exist two different arguments on the long term investment in stocks.
They are theoretical and statistical arguments. In theoretical argument is based on the CAPM model. In real market situations, it is not applicable. Thus the theoretical argument is baseless. The statistical argument is on the basis of historical statistical data on stock market returns. When taking the statistical figure over a long term period, it can see that returns from stock market investment are higher than returns from other investment options.
Here the long term is very long in nature and may exceed a life time. Prediction of the future return on the basis of past performance is subjected to various errors. The returns on share market are subjected to fluctuations due to various external as well as internal factors. Only best performing stock markets are taken for analysis. In the real market conditions, the returns from stock markets are not profitable when compared to other investment options for a long term.
It is due to the fact that the stock returns are never larger than companies’ profit. On a long term basis the revenue of the companies is stable in nature and thus a continuous growth cannot be expected in normal situations. Thus the growth of profit cannot be assured as it is directly related to the companies’ revenue. The stock figures in the last century reveals that stock price increasing is independent of the profits and revenue of the company and it is directed by other external factors. Thus it is sure that the there may not be a stable growing trend of higher P/E ratios in the stock return.
“The stock market has a tendency to discount what most investors believe, though. If the stock market believes that the companies in a broad, market weighted stock market index grow faster than interest on a risk free investment, then maybe that ought to have been discounted in the price of the stock market index.” (Are Stocks the Best Long Term Investment).
An article by Arjun Parthasarathy, Head- Portfolio Management Services, Sundaram BNP Paribas Asset Management has given importance to fixed income investments. The article says that the investor should look to capture higher yield that arise in the future. The main factor which determines the yield of an investment is the inflation rate of the economy. It is said that when interest rate appear for a decline and inflation slows it is better to invest in long term. The other factors mentioned in the article is demand and supply of fixed income instruments, central bank and government policies, liquidity flows of the company etc. (Parthasarathy 2008).
The study done by Boris Soboley, named Major Trend Shift in Bond Prices: How This Affects Gold, shows the latest trend of bonds and gold over the past decades. He states that major trend change is happening now after four years in the bond prices. The study reveals that the gold shows a leading way while comparing bond. Technical analysis is used to compare the bond and gold yield. (Major Trend Shift in Bond Prices: How This Effects Gold. 2007).
Investment has become a daily routine and people’s outlook of investing in stocks and shares has changed. The most secured form of investment is bank deposit which is risk free and which generate low income. Similarly bond is also a risk free asset for the individuals. The most speculative type of investment is property investment which yield high return during economic growth and vice versa. Study by Barclays Capital shows that long term investment has higher returns and UK housing market shows a cooling stage over the past two years. (Why Invest. 2009).
Mintel says that the world has changed in 2009 when he published his previous report named Long Term Savings and Investment. There was a severe financial decline which resulted in falling of the UK financial market. The report mainly covers the impact of financial crisis on the market over long term investment. The economic and investment climate, recent developments in the investment are the key issue of the report (Understanding Motivations for Saving and Investing for the Long Term. 2009).
The article Opening the door of Real Estate Investment shows a detailed description of the importance of real estate investment. It has mentioned that interest in real estate investment has increased due to the attractive risk return profile comparing to other options. It is low volatile and it generates a good income stream and long term capital appreciation. (Opening the Door to Real Estate Investment. 2007).
The report published by HSBC Bank namely Notice in Relation to Designated Investments and Associated Risk reveals the details to an investor about the Designated Investments including guidance to and warnings about risk associated with each investments. The report included the investments like shares, bonds, warrants, futures, options, foreign markets and foreign denominated securities; what they are and what are the risks associated with each. (Mifid: Markets in Financial Instruments Directive. 2008).
Investment theories; analysis of stocks is vital for investment decisions by assessing the risk and return on assets. The financial indicators used for the investment valuation such as alpha, beta and Sharpe ratio, is subjected to limitations as they cannot predict the future trend in the market accurately.
As per the modern portfolio theory it is better to spread investment risks over diverse assets such as low and higher risk bonds, shares, commodities and currencies. “An optimal portfolio would, in theory, be prevalent when the highest attainable indifference curve is tangential to the efficient frontier (Arnold, 2005).” (Schlinger). Thus before selecting the shares for investment, along with their expected returns, the risk factors also have to be identified deeply. It is better to select assets with lower volatility and risk return trade off.
Diversified portfolio will helps to bring down the risk factor to a constant of beta 1 which is equivalent o market risk beta. Bell and Quiggin (2006) states that as per the theory of efficient market hypothesis, relevant information in the stock market has influence on the stock price. It lets the rational speculators to earn higher return without incurring the proportionate risk. Thus informational misinterpretations will lead to crucial economic problems and financial risks. Pilgrem (1998) point out that investment decisions in share market are influenced by involvement of government in the market through open market operations, while longer term nominal interest rates on assets are determined on the basis of expected inflation trend in the economy.
As per the Liquidity Preference Theory, “higher future rates of expected inflation will lead to higher long term interest rates and vice versa.” (Schlinger). The VAR (Value–at-risk) model explains the risk related to portfolio in terms of statistical probability levels of monetary loss over a specific period of time. (Schlinger).
The research questions proposed in the previous chapter require changes over time to be observed. In order to answer the research questions proposed and provide evidence of findings, it is considered that the use of an archival approach is the most appropriate method of conducting research. Quantified primary data will be used alongside secondary data to observe how changes in past performance affect the future performance of the investment options. The primary research induced for this investigation will be completed by providing analysis on performance data of the investment options. By collecting the past performance data of the investment options over a financial period of 2004 to 2008 a comparative study could be undertaken which will help to achieve the research objectives.
Nature of Research: Archival Research Strategy
The main data source for this research project is performance data from the year 2004 to the year 2008. The form of data collected from the reports is raw, which mean that analysis has not been carried out on this data previously as it was collected for a different purpose. Data will be collected and subjected to new analysis using a variety of statistical measures like trend analysis. Archival Research means making use of the factual information from the existing records.
The main advantage of an archival research strategy is that it allows efficient research on questions that observe changes over time. The archival strategy was also chosen because it is the most feasible way of collecting information regarding large-scale trends including longitudinal studies.
“Archival materials give you direct access to the time or event you are studying. Using archival materials can help you:
- better understand your topic;
- apply your knowledge and experience in a specific area;
- develop your own ideas;
- gain a sense of “reality” about your project.” (Archival Research Tutorial. 2007).
The main limitations of this type of research are as follows:
- Access—government records may not be available, privately held records may be restricted
- Validity—because one is using data collected by others one is subject to the limitations and biases of the data. Archival data have usually been collected for purposes other than research
- Selective deposit and selective survival—what enters may be preselected
- Crime reports, many crimes go unreported
- Alternative explanations—unmeasured third variables, etc.” (Chapter 9 Non Experimental Research, Part 1: Observational Archival and Case Study Research).
Secondary Research: Secondary data such as books, academic journals, newspaper and internet resources are used along with the primary information to focus any arguments that can help conclude research objectives. Secondary data like internet databases and university libraries are easily accessible and most of it is without charge, so there is an obvious cost and time advantage. A further benefit of using secondary data is that it allows the author to use information that has been compiled from multiple sources and different perspectives.
Sample Description: This study analyses the past trends of the investment options in the long run. The investment options selected in the study are: bonds, gold, bank deposit, foreign currency market and real estate. The sample chosen for the study is through deliberate sampling. From the different types of bond like premium bond, convertible bond, discount bond, fixed income bonds; the type of bond chosen is fixed rate bond as it is more convenient to collect the data. So the data included in the study are:
- Top three one year fixed rate bonds included for the study are: ICICI 1 year HiSAVE, First Save 1 year Fixed Rate Bond, Halifax 1 year Fixed Rate Web Saver. (Fixed Rate Bonds).
- Price of gold over the past 5 years.
- Five major banks selected are: HSBC Bank, Royal Bank of Scotland, Barclays Bank, HBOS, Lloyds TSB. (Diem 2008). and their deposit rates.
- Exchange rate of foreign currencies like dollar, euro, and yen in the five years is selected. The foreign currencies selected are dollar, euro and yen as they are the most powerful currencies and most trading.
- The price of real estate over the past 5 years from a sample of five major agencies is also collected for the study. The real estate agencies from which the data is collected are Bellgrange Estates, Colordarcy Investment Ltd, Dubai Dreamz, Em Concepts, Investment Wizard Ltd. (Estate Agents with Offices in London. 2007).
- The risk associated with each type of investment option.
- The expected return and the actual return of each investment.
Sources of data: the data of currencies, bonds, gold are collected from the London Stock Exchange and MSN Money. The bank deposit rates are collected from the individual banks and the real estate prices from the real estate agencies.
Techniques used to Examine Data: Data collected for each of the variables will be useless if it is not appropriately examined. To answer research questions statistical analysis is needed to be performed on data collected. Descriptive statistics helps to understand the data through a summary of values and graphical presentations. The statistical tool used in the study is the chart displaying the trends. The measurements are taken in the chronological order i.e. from the year 2004 to the year 2008 and these are plotted against each years in order to understand the trend of investment options in the past five years. The risk analysis is done through the standard deviation method.
The greater the standard deviation greater will be the risk. A stock’s return is by calculated by its geometric mean, which is a way of taking an average that removes the distortion caused by negative numbers. And we’ll measure risk by looking at the standard deviation. (Calculating Risk and Reward is a Rewarding Exercise. 2009).
Time Periods Observed: The periods that will be subjected to analysis are 2004 to 2008 i.e. past 5 years. The time period has been limited to 5 years because of the constraint of getting data over a long period.
Timetable for Research
The research includes four sections and the period allotted for each are:
- March 1, 2009 – March 5, 2009 – Survey and data sourcing
- March 6, 2009 – March 15, 2009 – Data Collection
- March 16, 2009- March 23, 2009 – Data Analysis and interpretation,
- March 24, 2009 – March 31, 2009 – Final assessment
|serial number||Period |
|1.||Mar 1 – 5,‘09||4||Survey and data sourcing||Preliminary scouting for |
|2.||Mar 6 – 15, 09||9||Data Collection||Collation of data for analysis and testing|
|3.||Mar 16 –23, 09||7||Data Analysis and interpretation,||Analysis and determination of data|
|4.||Mar 24 – 31,09||7||Final assessment||Presentation of data|
Conclusion and reflections
Upon consideration of the facts and figures provided on the subject and assessing the needs of individualised investment portfolio, it is seen that, in the present context, gold investments surpasses other options, since the risks are high and returns do not justify appropriation of investments to these areas. Moreover, given the present imbalances between demand and supply side of gold, with growing demand, it is envisaged that gold prices could be safe buying (not trading) options for quite some time to come.
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