THE INVESTMENT SETTING
Answers to Questions
When an individual’s current money income exceeds his current consumption desires, he
saves the excess. Rather than keep these savings in his possession, the individual may
consider it worthwhile to forego immediate possession of the money for a larger future
amount of consumption. This trade-off of present consumption for a higher level of future
consumption is the essence of investment.
An investment is the current commitment of funds for a period of time in order to derive a
future flow of funds that will compensate the investor for the time value of money, the
expected rate of inflation over the life of the investment, and provide a premium for the
uncertainty associated with this future flow of funds.
Students in general tend to be borrowers because they are typically not employed so have no
income, but obviously consume and have expenses. The usual intent is to invest the money
borrowed in order to increase their future income stream from employment - i.e., students
expect to receive a better job and higher income due to their investment in education.
In the 20-30 year segment an individual would tend to be a net borrower since he is in a
relatively low-income bracket and has several expenditures - automobile, durable goods, etc.
In the 30-40 segment again the individual would likely dissave, or borrow, since his
expenditures would increase with the advent of family life, and conceivably, the purchase of
In the 40-50 segment, the individual would probably be a saver since income
would have increased substantially with no increase in expenditures. Between the ages of 50
and 60 the individual would typically be a strong saver since income would continue to
increase and by now the couple would be “empty-nesters.”
After this, depending upon when
the individual retires, the individual would probably be a dissaver as income decreases
(transition from regular income to income from a pension).
The saving-borrowing pattern would vary by profession to the extent that compensation
patterns vary by profession. For most white-collar professions (e.g., lawyers) income would
tend to increase with age. Thus, lawyers would tend to be borrowers in the early segments
(when income is low) and savers later in life. Alternatively, blue-collar professions (e.g.,
plumbers), where skill is often physical, compensation tends to remain constant or decline
with age. Thus, plumbers would tend to be savers in the early segments and dissavers later
(when their income declines).
The difference is because of the definition and measurement of return. In the case of the
, they are only referring to the current dividend yield on common stocks versus the
promised yield on bonds. In the University of Chicago studies, they are talking about the
total rate of return on common stocks, which is the dividend yield plus the capital gain or
loss yield during the period. In the long run, the dividend yield has been 4-5 percent and the