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Free «The financial planning Process» Essay Sample

The desire to accumulate wealth is inherent in all human beings. Since the advents of capitalism, there have been several vehicles of investment.The said avenues of investment include shares, fixed interest, cash and property. Each form of investments has got advantages and disadvantages. Each must, therefore, weigh which avenue works for him based on the advantages and the disadvantages (Graham & Dodd, 1951).

The first vehicle of investment is shares. Shares have numerous advantages and disadvantages. One advantage of shares is that they produce significant capital gains over the long run. This is because most companies give bonus shares to their shareholders by way of passing on profits. Other companies also give their shareholders what is called rights issue. This is where a company offers shares to its shareholders at discounted rates. This is also at the advantage of buying directly from the company without passing through brokerage firms. Money that could have been spent on brokers is saved (Graham &Dodd, 1951).



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Dividends are another advantage that comes with shares. Dividends are the post tax profits that a company earns. Since the introduction of dividend amputation, most New Zealand companies have started issuing a large portion of their profits to their shareholders. Other companies have reinvestment plans that help investors to buy additional shares from the companies they have invested in without going through brokers (Graham & Dodd, 1951).

Shares also enable an investor to diversify his or her investments. This is because one can buy their shares from managed funds, and also though superannuation. Shares also enable the shareholder to get discounts, and entitlements. Some companies like those in the hospitality business offer handsome discounts to their shareholders when they shop from those companies, or their outlets.

On the other hand, shares have some disadvantages too. One of those disadvantages is that there are fees that come with shares. These are the brokerage fees, and also the adviser fees that are given during share transactions. Another disadvantage is capital gains tax. One is liable to pay taxes for the profit earned from the sale of shares. The only exception to this is if the shares were bought before 1985 (Hassett, 2008).

Shares experience a lot of volatility. This is because they are growth oriented assets and they involve a degree of risk. It is a fact that the higher the degree for better returns, the higher the risk. This is because shares fluctuate from time to time. Shares prices change overtime. This leads to capital losses on the shares.Thus, a shareholder can lose his capital in the case where a company disintegrates.

The investment timeframe is short for share investing. This is because it is only seven years. The investment time frame for shares is affected by the fluctuating nature of shares. The issue of divided reinvestment has a downside. This is because the purchase of additional shares can bring complications in calculating gains made (Hassett, 2008).

Property is another vehicle of investment.Techinically, investing in property is known as real estate. It has its share of advantages and disadvantages. First, real estate has the advantage that it gives high profits, and a high value. A relatively small increase in property value results in handsome, returns. For example, if one buys a property for $200,000 and its value increase by 5 percent in a year, he will make a return of $10,000 in a single year (Hassett, 2008).

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Another advantage of real estate is that although it is a high cost investment option, it does not require lots of cash to get started. This is because of the ability to leverage. That is if one meets the borrowing requirements of banks, one can acquire property for relatively low payments. More favorable terms can be worked out if the buyer buys directly from the seller.

Investing in property enables one to set own pace in business. That is if one plans to build a business, one can do it at their own pace. After the first profits, one can reinvest the proceeds to expand the business. In this way, a businessman can get to control the pace at which he increases his market hold. Another advantage is that one can use the property he has purchased to borrow a loan to expand the business. This means that the property can be used as collateral. This is a great advantage especially at this time when banks must have some form of security to advance loans.

Real estate has also some disadvantages. One of the disadvantages is that the field does not have guarantees. That is although it is a remarkably inviting business; there is no guarantee to investors that they will make money. This has been evidenced by the mortgage crisis of the US in 2008 and 2009.Home prices can decrease rapidly without notice. Speculators can lose money in thousands of dollars, and homeowners can lose their homes.

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The real estate business ensures that the investor does not have liquid cash. This is unlike other investment strategies like mutual funds or stocks that have a lot of liquid cash. The process of buying and selling property can be long, and time consuming. If the property owner wants to sell a property in a short notice, he, or she might be remarkably frustrated. For example, during the mortgage crisis in the US, it was extremely difficult to sell property. In the said crisis, potential buyers faced extreme difficulties in obtaining credit from banks (Graham, & Dodd, 1951).

Another disadvantage of property is that property requires a lot of money to maintain. The cost of maintenance of and upkeep requires a lot of cash. This is especially more if the property owner has several properties. There are things that need replacement; the house needs repainting and gutters need to be cleaned. If you do not have the time to do the cleaning, you have to employ someone. Another expense that goes with property ownership is property taxes, and also insurance premiums (Graham, & Dodd, 1951).

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A popular form of investment is fixed interest investments. They have their unique advantages and disadvantages. They are safe and also secure. They are made up of unsecured notes, cash management trusts, bank bill and bonds. If the interest rate is too high, it can prove to be too risky. In this form of investment, capital is invested, and interest is paid. The interest is paid at fixed rates, or by use of a fixed formula. At the end, of the agreed term, the capital invested is paid back in full. Most investment terms run up to ten years. Building societies, credit unions, banks, life insurance companies and super funds are regulated by the central government. This is to ensure that they meet the financial promises on fixed interest packages (Graham, & Dodd, 1951).

One of the advantages of fixed interest investments is that it is more profitable at the short time than the other forms of investment. This makes it appealing to people who have to make money in the short time in the financial market. This is remarkably attractive to people who sell their houses, and they have to buy other houses after a short time. If one wants to place money in investment for only a few months, then fixed interest rates offer the best opportunity (Graham & Dodd, 1951).

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Another advantage for this investment schemes is that it is relatively safe. This means that the money of the investor is relatively safe. Every investor wants his or her investment to be safe. Many investors lose money in unsafe investments. This investment vehicle is protected by the government through various laws (Kiyosaki, 2001).

Fixed interest investments have the advantage that they do not require a lot of hands on experience, or work. They require less work on the side of the investor unlike real estate. It is like the investor just dumps his money in an investment scheme and receives it with a profit after some time. Other investment vehicles like real estate require a lot of work. They are remarkably demanding. Fixed interest investments, on the other hand, do not need much time. This is because the investment is managed by professionals. These professionals include people like insurance managers, fund managers and trusted bankers. This also means that the investors do not spend sleepless nights (Kiyosaki, 2001).

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Another advantage is that the amount invested is returned to the depositor at the conclusion of the investment time. This is comforting knowing that the money invested will be returned even as one enjoys the profits. This is viewed as conservative, and most people love conservatism because it protects their financial interests (Kiyosaki, 2001).

Fixed rate investments have their share of downsides. One of the downsides is that the investor does not enjoy capital growth. This is because the investor has consumed all the interest on the money. Other forms of investment bring capital growth. These include shares and property. The fact that fixed interest rates do not bring capital gains means if the currency of the country falls over time the investor experiences huge loses. Another disadvantage is that money that has been invested in fixed rates is taxed at marginal rates. This is remarkably painful if it is contrasted with shares that bring capital growth, offer tax advantages and dividends.

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It is useful to remember that the investor is not able to access the money until the maturity time. In case the institution allows repayment, a penalty is exacted. This is a great disadvantage as the investor does not have authority over the investment. In other words, the investor doe not have control over the money. In case the investor falls into financial hardships, he cannot bank on investment to rescue him (Sullivan & Sheffrin, 2003).

Another disadvantage is that fixed investment has a high rate of risk. This is particularly so if the investor invests in the schemes that are offered in Radios, Television and other press. If the interest rate is particularly high, the risk is also high.

A common form of investment is cash investment. This is especially so for people who are close to their retirement, and those people who panic over fluctuations in the other investment markets. Like all other investment avenues, it has its advantages and disadvantages.

The main advantage of cash is that there is the preservation of capital. This is a way of saying that money is placed in cash investments is remarkably safe. Money placed in money market funds, or under certificates of deposits might be covered with the government. This is to say that it is covered against loss. Cash investments are quite advantageous because they prevent one from liquidating assets from avenues such as bonds, or stocks. This is especially so when large expenses are coming on the way. They ensure that one does not sell a portion of investment portfolio if the market takes a bad break. Holding cash is an uncomplicated way of meeting financial emergencies (Sullivan & Sheffrin, 2003).

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Another advantage is that cash assets are exceptionally liquid assets. They can be exchanged quickly for services, and products. What is needed is to make a withdrawal to get immediate access to money. They come in hand in time of financial problems.

Like all other types of investments, cash investments have their share of disadvantages. The main disadvantage is that the return on these cash investments is relatively low. This is because they involve low risk. It is an established law in the financial planning process that the low the risk, the low the return. Higher rewards go to those who are willing to invest in riskier investments. Thus, investors will feel that they are missing out on big money if they invest in cash investments (Sullivan & Sheffrin, 2003).

In conclusion, it is evident that all the investment avenues have both advantages and disadvantages. The essay has highlighted both sides for very investment vehicle. Thus, it is upon the individual investor to decide what avenue to use.


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