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24 January, 2020 00:00 00 AM

Life cycle net-worth and investment strategies

Retirement and wealth succession gets priority, as investment horizons are becoming shorter and largely depending on how much savings you have put aside and how much pension you have
Md. Harun-Or-Rashid
Life cycle net-worth and investment strategies

For most of our life, we will be earning and spending. Rarely, however, will our current money income exactly balance with our consumption desires. Sometimes, we may have more money than we want to spend; all other times, we may want to purchase more than we can afford. And these imbalances will lead us either to borrow or to save to maximize the long-run benefits from our income. When current income exceeds current consumption desires, people tend to save the excess. They can do any of several things with these savings. One possibility is to put the money under a financial system until some future time when consumption desires exceeds current income. Another possibility is to sacrifice immediate possession of these savings for a future larger amount of money that will available for future consumption. This trade-off of present consumption for a higher level of future consumption is the reason for saving. And what you do with the savings to make them increase over time is called investment.

People come in all different shapes and sizes, and so do investment strategies. And in finances, each person has a unique set of wants and needs that determines their ideas about what they want to do with their money and when they want to do it. Also, consider revenue streams, like job, a good investment strategy is one that will get us to close our goals in the desired time, taking into account our age and our current earning ability.

Remember, as investors near middle age, the need for high return is often outdated by the need for balanced income, firstly, retirement is getting closer, so people become more realistic about prospective returns, as interest/profit on capitalization will not accumulate so much, and, secondly, other expenses start to come into play, such as your children’s higher education costs, paying-off installments on mortgage loan, and there is a bigger strain on the budget, and many other capital expenses also accrued and subsequently the outline changes to look for a steady return. There will be less leverage and basically a smaller percentage of the portfolio will be very vibrant.

Retirement and wealth succession become priority, as investment horizons become shorter and largely depend on how much savings you have put aside and how much pension you have. If you don’t have a big amount, then you should think of an insurance policy where you will receive a steady income for the rest of life.

If you have significant wealth and is planning to pass it on to heirs, however, then the asset management strategy is often very similar to the outline of middle-aged investors, with a proportion of the portfolio allocated for vibrant capital growth, but the majority positioned for long-term stable returns. The key to successful investing is diversification and understanding yours expectations. It is not only about age, but also the amount of wealth available.

As we said earlier, each individual’s needs and preferences are different; some general traits affect most investors over the life


Accumulation phase: Individuals in the early-to-middle years of their working careers are belongings to the accumulation phase. Although they often have a small portfolio, accumulators also have great potential for earning in the years ahead through job promotions and salary increases as they have a relatively long time horizon, they have time to recover from any short term fluctuations in the real value of their investment portfolio. As a result of their typically long investment horizon and their future earning ability, individuals in the accumulation phase are willing to make relatively high-risk investments in the hope of making above average nominal returns over time. For instance, a young person with the majority of their portfolio invested in stocks on the stock market has time to recover if the stock market in a crash that reduces the value of their portfolio.

If you’re an accumulator, some options you might want to think about include equities, mutual funds and other relatively risky investments, since they usually provide high returns, especially over the long-term. With a long time horizon, you can also take advantage of tax-free products which tend to require a long-term commitment.

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 education expenses, pay-off mortgage loans etc. They have already acquired certain assets to ensure they’re living a comfortable lifestyle, such as, a car and one or more homes. Consolidators can still accept moderate risk but your primary goal should be planning for retirement. Products best suited to people in this category can include deferred annuities, medium-to long-term bonds (i.e. principal protection), equities and real estate (i.e. principal growth). Earning exceeds expenses, so the excess can be reinvested to provide for future retirement or assets planning needs.

Spending Phase: The third phase is the spending or decumulation phase during which the individual is no longer working and is living on the income and capital accumulated in the first two phases. Loss of capital owing to investment in higher risk assets is not acceptable to the investor in this phase. Because their earning years have concluded (although some retirees take part-time position or do consulting work), they seek greater protection of their capital. At the same time, they must balance their desire to preserve the nominal value of their savings with the need to protect themselves against a decline in the real value of their savings due to inflation. The transition into the spending phase requires a sometimes difficult change in mindset; throughout our working life, we are trying to save; suddenly we can spend. Annuities, which transfer risk from the individual to the annuity firm (insurance company), are another possibility as they will receive a guaranteed income.

Gifting phase: Finally, there is the gifting phase, in which individuals who have accumulated far more wealth than they will need for their own lifetimes, decide to pass some of their assets on to others.  The life cycle theory suggests that as individuals move through these phases, their investment needs and objectives change significantly and, while being able to hold mostly risk bearing assets when young the individual needs to eliminate most investment risk as they grow old. The gifting phase is similar to, and may be concurrent with the spending phase. In this stage, individuals believe they have sufficient income and assets to cover their current and future expenses while maintaining a reserve for uncertainties.

Remember, financial markets and products have developed extensively, since the lifecycle theories first added recognition. It is now important for investors of all ages and wealth to consider their investment options in a more balanced manner.

Sophisticated risk-management strategies are generally employed by large corporations, however, such modern techniques are yet to find wider usage by individual investors to plan their investment portfolios.

The writer works at Social Islami Bank Limited (SIBL), (Appraisal Unit).                                                                


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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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