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The investor lifecycle: how it affects you

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Understanding where you are in the investor lifecycle is an important element of financial planning and wealth management. The investor lifecycle sees investors going through three basic stages in their investing career. These include the accumulation phase, the consolidation phase and the spending phase/retirement. Where you are positioned in the lifecycle has implications for your asset allocation and the type of investments you should own.

Today, I’m taking a closer look at the investor lifecycle and examining what kinds of investments are suitable for each stage of it.

The accumulation phase

The accumulation phase is the first one. It begins when you start earning an income, and generally ends somewhere around your mid-40s, although age is not always the determining factor. The focus of this stage is accumulating wealth and the key is to be disciplined with your money, pay off debt, and invest as much as possible. Retirement is a long way off in this phase, so you can afford to take more risk, as there is more time to ride out market fluctuations.

In the early part of the accumulation phase, investing in growth investments like shares is a sensible idea. High-quality smaller companies are worth considering. These types of stocks can be more volatile, but for an investor with a long-term investment horizon of 30 years or more, there is time to recover from volatility. Mutual funds, investment trusts, and exchange-traded funds (ETFs) that focus on growth stocks are a good way to invest if you’re just starting out. These investments can generate fantastic long-term returns while diversifying your capital over many different companies. 

By your 40s, while you’re most likely to still be in the accumulation phase, you now have less time until retirement, so your risk-tolerance is likely to be a little lower. Investors in this phase could choose to focus more on large-cap stocks that are a little less risky, yet still have the potential to generate decent returns over the long term.

The consolidation phase

The consolidation phase run from your mid-40s up until retirement. In this stage of the cycle, many of life’s large expenses (house deposits, weddings etc) will be out of the way. Your earnings are likely to be higher too, and therefore you should have more capacity to save and invest.

However, in this phase, there is less time to retirement. You may be looking to retire in 10-15 years, so you have to be careful with your money. There is more of a focus on capital preservation. Many investors choose to lower their allocation to equities slightly in this phase. However, retaining an allocation to equities is important, as you could potentially still have 40+ years to live. 

The spending phase

Lastly, we have the spending phase, which is retirement. Wealth fluctuations are less desirable in this period of your life, so your risk-tolerance will be even lower. Less exposure to equities is sensible. Having said that, a small allocation to blue-chip equities is probably wise in this phase, in order to combat the effects of inflation over this period of your life. Maintaining some exposure to low-risk stocks could be a good idea. 

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