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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 -
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...
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
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...
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
- 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
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
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
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
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
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
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
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?
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
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...
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...
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...
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
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
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
