Life Cycle Investing is the process of adjusting the investment portfolio to suit the changes in one’s life objectives as they pass through different life phases.
Life Cycle investing generally advocates the concept of reducing risk and emphasizing income as one ages.
The 4 Life Cycle phases are:
- Accumulation – Age 20s to early 30s
- Saving – Age early 30s to mid 40s
- Pre-retirement – Age mid 40s to late 50s
- Retirement – Age Late 50s onwards
There are several factors which will affect the choice of investment assets throughout the life cycle phases:
Age – Younger investors tend to have higher risk tolerance than their older counterparts. This is because if they incur any losses on their investments, they have more time and opportunities to recoup it.
Funding – The stability of the sources of income will affect the type of investment assets. A person with multiple sources of income is more likely to be able to adopt a higher risk portfolio, without an immediate need for liquidity.
Family Commitments – Obligations like having to provide education fund for young children, or financial support to aging parents, will mean that current income and preservation of capital would be of great importance.
Debt – Someone with low gearing and high liquidity will have a bigger appetite for a riskier portfolio, as compared to a highly geared person with deteriorating liquidity ratio.
Investment Experience – A seasoned investor will usually have an appetite for a higher risk portfolio, given their familiarity with different investment vehicles and the risks involved. In contrast, a novice investor should avoid committing large sum of savings into high-risk investments. This is because any huge losses incurred early on, will have a detrimental effect on building an effective long-term investment program.
Risk Tolerance – Rational investors are typically risk aversive or at best risk tolerant. They will not accept high-risk investments, unless they are compensated proportionately by higher returns.
Portfolio Objectives – The assets of the portfolio should be selected, according to the objectives of the portfolio (growth, income or capital preservation). High-risk assets at one end of the risk profile continuum would better serve a growth objective while a capital preservation objective can be achieved by the low risk secured assets.
In part 2 of this article, we shall talk more about the suggested investment allocation for the 4 life cycle phases.
If you need advice on investing and financial planning, do contact your trusted FLA Organization Financial Planner for consultation today.
