When I was a financial advisor, I aimed to ensure my clients understood that investing is a lifelong process. Rather than a hobby to throw money at every once in a while, investing should be a constant, a way to interact with the economy and grow a portfolio.
Of course, before investing it’s important to set up an emergency fund. This is money that lives in a bank account in case of unexpected expenses. It should, at the least, be enough to cover several months worth of expenses, should a crisis strike.
Once that cash has been set aside, investing can begin – and the sooner, the better.
However, each person brings their own unique lifestyle, income, and perspective into the market and these varying factors will certainly influence trading choices. Therefore, life cycle plays an important role in the type of investing that’s best for an individual portfolio, and each stage requires different techniques and tools to keep in mind.
Three Broad Stages
There are three broad categories in the life cycle of investing: the accumulation phase, the consolidation phase, and the spending phase.
The accumulation phase refers to early working life, when a person has just entered the working world and is beginning to earn money. This is when, as an investor, risk tolerance should be highest since retirement is further in the future.
Therefore, the consolidation phase begins when earnings are accumulating most rapidly. An investor, at this point, has established a career and has already endured some of life’s bigger expenses, like the initial down payment in purchasing a home or even the expansion of a family.
So the spending phase is a fancy term for retirement. Hopefully, having invested during the two earlier phases of life, a person has been smart with their money and has a sizable nest egg to draw upon after leaving the workforce.
These three very broad buckets can be broken down even further to more intricately represent the stages of investing.
Where Are You in the Life Cycle?
The accumulation phase typically starts as soon as a person lands their first job and lasts until about the age of 35. By then, many people have gotten married and started a family.
At this stage of life, it’s important to be disciplined with money. The tendency, nowadays, is too often to spend money as soon as it’s earned, but this bad habit could lead to tremendous financial trouble down the line.
Savings are crucial in order to pay off any loan debt and save for a down payment on a home. This money should kept in a savings account, secure from the temptations of impulse buys.
During this time it’s also imperative to begin investing money. Take advantage of an employer 401(k) plan. Or set up an IRA account for your retirement. And for those with families and children, don’t forget to start a college fund with a custodial account or a 529 plan.
Even if budgeting only allows for saving $100 a month, that money will make a major difference in the years ahead, thanks the compounding power of money.
The consolidation phase then covers, roughly, ages 35 to 60. These are the peak earning years for most individuals.
Presuming that many of life’s more expensive purchases are out of the way by this age, approximately 10% to 20% of a person’s annual income is now investable. On top of expanding a portfolio, it’s beneficial to max out 401(k) contributions and open an IRA account, as well.
The spending or retirement phase, thus, begins around the age of 60.
In previous articles, I divulged extensive blueprints for successful retirement investing, the focus of which involves drastically lowering allocation to stocks in the two to three years before and after a planned retirement date. By withdrawing a bit from the market, precious capital is preserved in the event of another 2008-style meltdown.
Then, after retirement is safely underway, an investor can raise stock allocation back to normal levels. This growth will be necessary to maintain a comfortable lifestyle, as well as to offset the rising costs of healthcare and other necessities.
Pay Attention to Allocations
Each phase also requires specific attention to asset allocations.
These should be tweaked in each individual case in regards to unique circumstances.
Nevertheless, some broad guidelines are applicable in any instance.
First and foremost, don’t forget to set aside that emergency fund.
In the accumulation phase, youth is the greatest asset.
Younger investors can afford to put 85% to 90% in stocks, take more risks, and be more aggressive in their trades and buys. Put at least a quarter to a third into emerging and frontier market funds. That’s where future growth lies. The rest could be in the U.S., with a mix of growth and value.
The remaining 10% to 15% of investable income can then go into a top-flight bond fund such as those run by Jeff Gundlach of DoubleLine Capital.
During the consolidation phase, it’s advised to increase the bonds portion by 10% to 15%. That adjusted fraction could be taken out of what was previously allocated to the international and U.S. growth investment portion.
Finally, in the retirement phase, remember to withdraw in the years surrounding your retirement date. Once those transition years have safely passed, stock allocation can, then, be raised back to at least 50%, with 10% to 15% still invested overseas.
Using these broad strokes as investing guidelines, adjusting when necessary to reflect individual circumstances, anyone at any stage of life can enjoy the benefits of participating in the market.
Most importantly, however, is this: Start investing yesterday. Today is already too late.