Absolute and relative performance orientation.
One significant difference between an absolute- and relative performance orientation is evident in the different strategies for investing available cash.
Relative-performance-oriented investors will typically choose to be fully invested at all times, since cash balances would likely cause them to lag behind a rising market. Since the goal is at least to match and optimally be at the market, any cash that is not promptly spent on specific investments must nevertheless be invested in a market-related index.
Absolute-performance-oriented investors, by contrast, are willing to hold cash reserves when no bargains are available.
1. Cash is liquid and provides a modest, sometimes attractive nominal return, usually above the rate of inflation.
2. The liquidity of cash affords flexibility, for it can quickly be channeled into other investment outlets with minimal transaction costs.
3. Finally, unlike any other holding, cash does not involve any risk of incurring opportunity cost (losses from the inability to take advantage of future bargains) since it does not drop in value during market declines.
One significant difference between an absolute- and relative performance orientation is evident in the different strategies for investing available cash.
Relative-performance-oriented investors will typically choose to be fully invested at all times, since cash balances would likely cause them to lag behind a rising market. Since the goal is at least to match and optimally be at the market, any cash that is not promptly spent on specific investments must nevertheless be invested in a market-related index.
Absolute-performance-oriented investors, by contrast, are willing to hold cash reserves when no bargains are available.
1. Cash is liquid and provides a modest, sometimes attractive nominal return, usually above the rate of inflation.
2. The liquidity of cash affords flexibility, for it can quickly be channeled into other investment outlets with minimal transaction costs.
3. Finally, unlike any other holding, cash does not involve any risk of incurring opportunity cost (losses from the inability to take advantage of future bargains) since it does not drop in value during market declines.
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