What are your investing goals?

As you age your financial and personal circumstance change

And so does your risk tolerance

Let's find out how you should be investing in

"The Life Cycle Hypothesis"

- A THREAD -

If you're unsure of how you should be investing your money then this threads for you

There are 5 stages to the Life Cycle Hypothesis that can help determine your investment strategy moving forward

Do you know which stage you fall into?

Let's take a look...

The 5 stages of the Life Cycle Hypothesis:

Stage 1 - Early Earning Years

Stage 2 - Family Commitment Years

Stage 3 - Mature Earning Years

Stage 4 - Nearing Retirement Years

Stage 5 -Retired Years

Stage 1 - Early Earning Years (18 to 35)

Begins when you start to work and have some income rolling in

But it ends when family commitments start to impose on financial demands

Those in Stage 1 generally haven't started a family and their goals are short term...

Some common goals include:

- Car purchases
- Vacations
- Saving for a home

They also don't have life insurance and probably don't need it yet

A typical asset allocation for their goals might be

- 80% equities
- 20% fixed income

Stage 2 - Family Commitment Years (25 to 50)

Notice how Stages 1 and 2 overlap in age?

That's because Stage 1 ends when family commitments become significant

And that's when you move into Stage 2

Those in Stage 2 are typically married and may have children

This creates a larger financial burden

Increased expenses, saving for education, more financial obligations

One of the distinguishing factors between Stage 1 and Stage 2 is lack of liquidity because of mortgage & car payments...

Which makes saving for retirement more difficult

However, salaries start to increase with added experience over time

Maybe your company is starting to take off or maybe you got a significant pay raise at your job

Therefore as time passes more savings can be allocated towards education funds and retirement

Typical asset weightings may shift for those in Stage 2

We usually see more allocation towards fixed income as their risk tolerances start to decrease

And they rely on a more steady stream of income rather than growth potential

Stage 3 - Mature Earnings Years (45 to 60)

Again this age group overlaps slightly with Stage 2

Because there is no set path in life

You have to identify where you're at personally and go from there

A dual-income family in a high tax bracket will have a shorter Stage 2

Whereas a single-income family in a lower tax bracket may stay in Stage 2 for much longer

In many cases, those in Stage 3 have already made arrangements for short and medium-term goals

Therefore they are now able to focus more on their retirement

Because they are probably in a higher marginal tax bracket at this point in their lives

They are more likely to switch back to a higher weighting in equities for tax reasons

As bonds will generate interest income that is fully taxed

Dividends and capital gains get more breaks

Stage 4 - Nearing Retirement Years (55 to 70)

Again we see an overlap

But investors in this stage are in their peak earning years

And are more financially well off than those in Stage 3

What distinguishes Stage 3 and Stage 4 investors?

1) Stage 4 investors have fewer family commitments

They are typically "empty nesters"

2) They are more focused on wealth preservation (more risk-averse) as they are closer to retirement

As retirement gets closer, the equity portion will shrink and fixed income will increase

Finally...

Stage 5 - Retirement Years (60+)

You enter this stage when you choose to retire (hopefully it's not at 60 and much earlier)

However retired investors face a conflict:

On one hand, they rely on their savings to maintain their standard of living...

On the other hand, they need to keep their remaining funds invested so that they earn enough of a return to live on

The issue becomes...

Higher returns and more risk?

Or

Lower returns and less risk?

Many investors in retirement also want to leave an inheritance behind...

So they tend to focus on estate building and wealth transfer

Those investors in Stage 5 will typically see a decline from equities and a shift towards less volatile fixed-income investments

As you can see, there's tons of overlap in the Life Cycle Hypothesis...

So you need to do a deep dive into your own current life situation to determine where you stand

Although your investing goals change as you age and you take on more responsibility

The principles of investment analysis don't

If you want to fast track the process & retire earlier than the rest

You need to upgrade your knowledge and learn how to build wealth in the market

The recipe is simple:

Invest in strong companies that will pay you for the rest of your life

Here's how: https://bit.ly/dividendmoney