Question

A customer asks for your advice about investing K50, 000.00. How would you deal with this request? Critically explain the main factors affecting investment performance in a given economy.

Answer 1

Factors that affect investment performance in an economy :
1. Rate of interests : Interest rates influences the investments as these are mostly financed by borrowing. The opportunity cost drastically increases with a higher rate of interest as we lose out on the payment of interests.

2. Growth in economy : The purpose for investing is mostly to meet future demand. Hence, if demand does not grow, then the number of investments will drop steadily. Hence, with an economy growing steadily, investments also grow in number and vice versa

3. Expectations : The possibility of someone investing is completely dependent on people having confidence on future trends, demand , et al. The effect of confidence on investment is cyclical in nature, i.e. if the future beckons an economical growth, people invest more, and vice versa.

4. Inflation rate : Generally low rates of inflation tend to be more stable in terms of people or firms investing more. A higher inflation rate would imply uncertainty, which would affect confidence, and maybe inflation due to demand, which would also affect economic growth.

5. Financial availability : For an individual, having adequate savings would imply his/her chances of investing more. In case of banks, they lend less amount of money if they are often caught in a financial crisis; and this in turn affects the quantity of investments occuring. In an economy, the amounts of funds that is offered for investments are directly proportional to savings levels in the economy

The advice to the customer would be to consider these five major factors while making an investment worth K 50,000.00 . He/she would have to be intuitive about present conditions in his/her country along with past trends, so as to be brave about somewhat predicting what the future trends beckon, and take a wise decision.