Life cycle investmentYour risk appetite usually changes with time

--Source :Bangkokpost.com
By: SUTHEE LUANGARAMKUL
Published: 18/12/2008 at 12:00 AM
Ref URL : http://www.bangkokpost.com/life/financialadvice/8305/life-cycle-investment

When you start planning your investments, you should develop a policy statement before making a long term investment decision. Generally, the financial plan should be designed to meet an investor's age, financial status, future plans and needs. Some investors have sized short term expenses such as tuition fees, housing installments or car loan, thus their savings should be invested in short term vehicles.

Some investors plan to invest for life after retirement, then the suitable investment should be long term, rather than short term.

An individuals' investment strategy will change over their lifetime and one's need and risk appetite usually change when time changes.

Although each person has different needs and preferences, there are some common characteristics along one's life cycle which can be classified and developed as optimal investment strategies for life cycle.

Four life cycles phases

- Accumulation phase: This is the period career starting. It implies the period of accumulating wealth and assets to meet immediate needs such as purchasing a house, car and long term goals such as a child's education and retirement.

Generally, their wealth is relatively small but usually may have huge obligations. As people in this phase of life generally have a longer investment period and longer income generating ability, the appropriate investment style is to invest in moderate to high risk investment like stocks and real estate in order to gain above-average returns over time.

- Consolidation phase: It is normally during the middle of a working career. Financial characteristics are to pay off much of their debts and to gain extra income.

Since this phase still possesses enough time before retirement, moderate risk investment is recommended. However, at this stage, investors would like to have a certain level of security in investment and are concerned about the level of risk. Investors may apply the investment diversification concept to lessen risk exposure. Don't put all of your eggs in a basket.

- Spending phase: It starts at retirement, when none or little income is earned. Living expenses are met with an income from prior investments or/and pension funds. As their money-making years have ended, investors seek greater protection in their capital, with no loss or risk exposure.

The major threat for investment at this phase is real value of money, which can be lost from rising inflation. Suggested investment scheme for spending phase is less risky asset but some portion of portfolio should invest in moderate risk assets to protect themselves from inflation.

- Gift phase: The gift phase is similar to the spending phase. People in the phase have sufficient income and assets to cover their living expenses. They also have a financial cushion for unexpected needs. Thus, excess assets could be used for charity and providing financial assistance to family and friends.

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Comment by kasmala Mar. 04,2009 hit+++++++

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