Post a single question on the single most confusing or least clear point from the reading for this week. Below is the literature from the reading. 1-2 references. Please compare a 100 word question with commentary.
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Literature from the readings:
MEETING LIQUIDITY NEEDS WITH SHORT-TERM INVESTMENTS
Planning for and providing for adequate liquidity, in the event of unexpected expenses or opportunities for example, is an important part of an investment plan.
Liquidity: the ability to convert an investment into cash quickly with little or no loss in value.
* The Role of Short-Term Investments
* Common Short-Term Investments
* Investment Suitability
The Role of Short-Term Investments:
* Primary function is to provide a pool of reserves for emergencies of simply to accumulate funds for some specific purpose.
* Short-term investments earn either a stated rate of interest or earn interest on a discount basis,
* Discount basis: you buy a security at a price below its redemption value and the difference between what you pay to acquire the asset and what you are paid when it matures is the interest the investment will earn (E.g., U.S. Treasury bills, or T-bills).
* Advantages and Disadvantages:
* Advantages: high liquidity, low risk of default
* Disadvantages: low levels of return, loss of potential purchasing power from inflation
Sample of a response
Misguided advisors typically recommend products that are unnecessary or costlier than clients need. (Zutter & Smart, 2022) What defines something as misguided and how does a planner measure that threshold? It appears that certain well-respected companies, like Northwestern Mutual, carry outdated features like front-loaded funds. Some companies carry high-expense ratios or rack up trading fees. If the measure is to improve a client’s situation both financially and emotionally (feelings about their future financial security), then might these products or services still be considered in their client’s interest? It is most assured that advisors and planners can find holes or inefficiencies in others’ plans, but what defines that line in the industry? How do financial planners gauge a rip-off? Is it purely costs? If a product altogether does not suit a need?
References
Zutter, C. J., & Smart, S. S. (2022). Fundamentals of Investing Fourteenth Edition. Pearson.
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