UNDERSTANDING where you are in the individual investor life cycle is an important element of managing an effective investment portfolio. The investor life cycle refers to the different stages of investment ownership from the initial purchase, to the sale of the investment. The most commonly used investor life cycle includes the accumulation phase, the consolidation phase, the spending and the gifting phase. The asset allocation decisions are usually different at the various stages of the investor life cycle. We have all heard that we should invest in more equities at an early age. But while age is important for asset allocation, its importance is relevant only because our conditions and resources change over time. Individuals at different stages of the investor life cycle can be of the same age, but would still need to have different asset allocation strategies.

Individuals at a certain stage in life, accumulate many things to meet their immediate needs and their longer-term goals. These include homes, cars, furniture, college education for children and retirement. At this stage, developing an early investing habit is very important. Setting-aside money to invest on a regular basis is also important at this stage. Individuals at the accumulation phase of the investor life cycle, have a longer time horizon, and should be willing to make higher risk investments.

At the consolidation phase, outstanding debt would have paid off or, at the very least, the funds to pay off these loans can be identified. Funds can also be identified at this stage to help with the children’s college expenses. Capital preservation is extremely important in this phase, and the investor is usually able to set aside a greater portion of earning.

The spending and gifting stage of the investment life cycle is somewhat a reward to the investor for disciplined investment practices over the years. This stage usually occurs at retirement, where the investor would be receiving income from possibly an employer retirement plan as well as income from their investment portfolio. This is where the investor reaps the benefit of proper asset allocation and a structured investment portfolio. The investor feels comfortable at this stage, knowing that living expenses are taken care of. The investor at this stage is at the end of their earning years and depends solely on income from their investment portfolio and other retirement plans. The gifting stage runs concurrent with the spending stage. This is where excess assets if any will be used to provide financial assistance to relatives and friends, or even to charities.

It is very important that the individual investor understands where on the investing life cycle they fall. Contrary to popular thinking, age should not be the determining factor in asset allocation decisions. An individual can be close to retirement and still find that they are in the early accumulation phase. This is a less than ideal situation for any investor. Care must be taken, however, to ensure that the rules that apply to the accumulation stage are followed. It could mean however that the individual would forgo or substitute some immediate and long-term goals such as continuing to rent instead of thinking of buying property. Investors differ across the investor life cycle stages. Family situations, career challenges, and health issues make each investor unique at the different stages. This must be taken into consideration when making investment and asset allocation decisions.

Noel Harty is the manager of the Montego Bay branch at Stocks & Securities Ltd. Contact: nharty@sslinvest.com