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Ch 14 page 8

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Carmen

Keen member
Hi,
I would like to ask about the paragraph below under the subpoint Term:
  1. Investors who have low present cashflow requirements may prefer low income yielding investments to avoid the expense and uncertainty of reinvesting income.
  2. Conversely, investors who need current income may prefer high income yielding investments to avoid the expense and uncertainty of realising assets.
For the first point, what does "low present cashflow requirements" mean and how does it relate to wanting to avoid uncertainty of reinvesting income?

For the second point, does "uncertainty of realising asset" refer to "risk of not being able to sell off the investment"? For example, let's say I take a bond. Does it mean that since I desire the current income from the coupons, there's no need for me to worry about finding buyers to buy off my holding?

Thanks in advance!
 
Hi Carmen
Regarding the first part of your question, low present cashflow requirements means that the investor in question has liabilities that don't require high immediate outgo (cashflows from the investor). This means that, if the investor has high income yielding investments, they will get income higher than outgo and will need to invest the surplus income they receive on uncertain future terms - uncertain due to economic uncertainty. They may therefore prefer to minimise this uncertainly and invest in high growth low income assets and, in other words, better match their liabilities.
Regarding the second part of your question, yes, you've got the right idea. If your liabilities are such that you need to make high levels of outgo in the immediate future, you will prefer investments generating higher income to avoid the risk of having to sell asset in future (if income is not sufficient to cover outgo) at prices that are lower than ideal. Prices being lower could be due to two reasons - economic fluctuations or needing to sell too much of a less marketable asset, meaning you'll have to sell at a lower price to make the sale happen.
Hopefully this help.
James
 
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