The Life Cycle of an Individual Investor
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| The Life Cycle of an Individual Investor |
The investment needs of an individual changes over a person’s life cycle. An investor has 4 main phases in his/her life cycle.
1. Accumulation Phase
1. Accumulation Phase
Individuals in the early-to-middle years of their working careers are in the accumulation phase.
As the name implies, these individuals are attempting to accumulate assets to satisfy: Immediate needs such as down payment for a house
Longer term needs such as children’s college education, retirement etc.
As a result of their long investment time horizon and their future earnings ability, individuals in the accumulation phase are willing to make relatively high-risk investment in the hopes of making above-average returns over time.
2. Consolidation Phase
Individuals in the consolidation phase are typically past the midpoint of their careers, have paid off much or all of their outstanding debts and perhaps have paid or have the assets to pay their children’s college bills. (earnings exceed expenses)
Earnings exceed expenses, so the excess can be invested to provide for future retirement or estate planning needs.
The typical investment horizon for this phase is still long, so moderately high risk investments are attractive.
3. Spending Phase
The spending phase begins when individuals retire. Living expenses are covered by social security income, income from prior investments etc.
Because their earning years have ended, they seek greater protection of their capital. Their overall portfolio maybe less risky than in the consolidated phase.
4. Gifting Phase
The gifting phase is similar to the spending phase.
In this stage, individuals may believe they have sufficient income assets to cover their current and future expenses. Excess assets can be used to provide financial assistance to relatives, friends or to establish a charitable trust or fund.
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