Despite what you may have heard, there is no secret to growing sustainable wealth through each investment life stage. It simply relies on sound and consistent financial behaviour like budgeting, continuous savings and prudent, yet profitable investment decisions.
Many of us put off investing, citing reasons such as the poor economic climate, a lack of knowledge or a lack of funds as reasons. Yet, looking at statistics, it is unwise to ignore the powerful benefits of compound interest – interest paid on both the principal amount invested and the accrued interest. Even if you have not saved regularly before, the good news is that it is never too early or too late to start saving. Below are the ideals you can strive to achieve in each investment life stage, to grow your and your family’s wealth:
Different goals at each investment life stage
As with most things in life, your investment needs will inevitably change over time. It is therefore a good idea to create a long-term plan that is flexible enough to adapt to these changing life stages. Generally speaking, the life cycle of an investor can roughly be divided into four stages – accumulation, consolidation, spending and gifting.
In the accumulation phase, investors are usually at the beginning of their careers, with relatively low net worth and high debt levels. The most important things a young investor can do is to start, even if it is with a small amount, and to learn as much about investing as possible.
Once you’ve started, the next important thin is to take on some investment risk in anticipation of above average returns, because you have the benefit of time on your side to recover from short-term losses. Additionally, it is wise to diversify your investment portfolios across different asset classes to maximise returns and minimise risk. A word of caution is necessary – while taking on more risk for more reward is a sound strategy, beware of dodgy schemes offering unrealistically high returns.
During the consolidation phase, you will generally be past your career midpoint and ideally have acquired a reasonable base of tangible financial assets, such as a home or other property, retirement savings, etc. In this phase,your goal should be to eliminate as much debt as possible and increase your savings. Resist the temptation to splurge as your financial responsibilities lessen. While pleasurable in the short-term, the return on investment of a sports car or world trip is low over time. Rather reward yourself for hard work during your lifetime with small indulgences and by boosting your retirement fund. Such an investment will yield returns that last much longer.
It is also a good idea to consider your capital preservation strategies during this stage. To achieve this, you will need to review your investments’ asset allocation holistically and adjust the exposure to higher-risk investments to accommodate the shorter investment time frame. Ideally, the goal is to invest to earn stable, yet inflation-beating returns that can be reinvested to grow.
The spending phase usually begins at retirement. During the spending phase, individuals should have very little or no debt. Here again, it is advisable to minimise risk exposure and be mindful that spending, or income withdrawals, should not erode your capital. Additionally, while the focus is in this phase is on capital preservation, it is also important to ensure investment returns keep pace with inflation.
The gifting phase usually occurs concurrently with the spending phase, when investments become the principal source of income. Resources permitting, individuals can now use investment proceeds to provide gifts to other individuals or organisations. While having a will is important during each investment life stage, during this phase estate planning and tax considerations are paramount to preserve one’s wealth for future generations.
Whatever your investment stage, seeking the advice of a trusted financial advisor is essential to ensure you meet your investment goals. Throughout your lifetime you should continually assess your need for growth or income and determine your overall tolerance for risk. But if you just take one piece of advice today, it is to start today, no matter how small your investment is.
Listen to Dr Anton Hay, Marketing Director of Ecsponent Financial Services, as he discusses the life stages of investment on Radio Helderberg in an interview on 6 June 2016.