Age can guide decisions on investment
April 9, 2015
Investing complexity can be managed with a simple investing strategy.
The investing strategy starts with you; more specifically it starts with your age. Age guides you through all aspects of life and it is no different from how you manage your money.
A starting point is to divide your life into three equal parts. We will assume your life expectancy is 90 years.
The first part of your life is from birth to age 30.The second part is from age 30 to 60 and the final time is age 60 to 90.
To say that you were a different person during these three different time periods is stating the obvious. You are an extremely different person and your investing strategy during these time periods should be different too.
The first 30 years of your life are required to build a base and that is all about accumulating human capital. Get a good education and some work experience and it is that solid base that will determine your earning power in future years.
Youth is the time to invest in your education. Your investment is time, effort and money and that investment will lay the foundation for your financial future.
A 30-year-old’s currency is their human capital and the most important aspect of that human capital is their education. There are many studies that show the strong correlation between a good education and a strong earning power.
At age 30 you will start to cash in on your human capital and realize your good earning ability. You may think you are broke because you have very little financial assets but you’re human capital should not be underestimated. That is your future.
You are entering middle age and saving to buy a house, raise a family, assist children with their post secondary education and finally plan for retirement.
Financially you have the ability to take risk. Your investments will likely be heavily weighted in stocks because your time frame is long and the normal volatility of the rise and fall of markets is acceptable.
The bulk of your life’s earning ability will be between the years of 30 and 60 years. You will earn, spend and save. The decisions you make during these years will have an impact on the final decades of your life.
Part of the investment challenge now is the allocation of earnings to spending and savings. There is plenty of motivation to do both. That ultimately reflects your personal priorities and your personal financial discipline.
The final third of your life is between age 60 and 90. In this stage your investment focus will shift from earning to preserving capital and spending. That is a very significant adjustment.
The first major adjustment you made was going from the student part of your life where you were building a base to suddenly starting to earn income. Having money flow in for the first time in your life was an easy adjustment.
At some point when your career is over the money will stop coming in and that can be scary. Your investment strategy will change from accumulating assets to preserving those assets. You will want to start withdrawing assets to provide cash flow during retirement.
The asset allocation of your portfolio will likely start to shift by decreasing the amount held in stocks to holding more in bonds. This gradual shift to a more defensive portfolio would be done by forecasting your retirement cash flow requirements.
Your money has to be safe but it does have to maintain some growth to keep up with your required purchasing power that factors in inflation. Each year the dollar buys less and if you are fortunate to live a long life that will become very important as the years go by.
The three stages of life are very easy to understand and the best way to approach your investing is to realize that financial decisions are based on where you are in life and what you are hoping to achieve.
Consider your age and that will a good guide to making investment decisions.