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11/03/2014

Investor Life Cycle: Where are you?

Understanding how to invest money to appropriately meet a clients needs and expectations is the job of an Investment Management Professional. Determining where clients are in their life cycle needs to be determined in order to make appropriate decisions. Typically concepts such as Time Horizons, Risk Tolerance, Investment Knowledge, Current Income and Years of Investing Experience are discussed to determine how to appropriately allocate capital.

There are many other concepts often discussed along with these but an understanding of where someone is in their investment life cycle can also be very helpful to making decisions.

What is the Investment Life Cycle?

It can be defined many ways but I find the following three phase approach to be simple and helpful when combined with other concepts for deriving portfolio construction and selecting specific investments.

  1. Accumulation Phase-earliest stage in an investors life cycle where the investor is accumulating assets. There is a long time horizon and often more risk can be accepted because there is more time to achieve objectives. In this phase there can often be short term needs that must be considered and the appropriate amount of investment risk taken: such as when a large purchase is looming. For instance the purchase of a home.
  2. Consolidation Phase-this phase is typically when wealth accumulates more rapidly. In this phase many of life's large purchases and immediate cash needs are already addressed and income is often significantly out pacing expenses allowing for more rapid building of wealth. Time horizon to the next phase (Spending Phase) is getting shorter over this phase.
  3. Spending Phase-this phase is signified when earned income has ended and investment income from accumulated wealth is now the primary source for living expenses. Typically called retirement. Longer life expectancies can lead to long time horizons in this phase. Some would say this is the phase where one would now enjoy the utility of the wealth they have created. Risk tolerance tends to be significantly lower as asset fluctuations are less desirable. However some risk is often required for potential growth to combat the prospects of long time horizons in this phase.

Understanding which phase you fit into can greatly help with understanding why certain investments are necessary and how they fit into your overall investment portfolio. Knowing what phase you are in can make the uneasy feelings about investments more understandable as to why they may be necessary.

To discuss your specific situation please contact Prominence Captial at 310-433-5378. We can also be contact via the web at www.prominencecapital.com

 

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