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Life cycle investment strategy 2

Following from our previous discussion, here are some of the strategies that will help you depending on the phases of your life:

1) Accumulation phase
You've just started work and you have lots of debts. You will need to invest in near term goals. Your primary mission is to manage your money and debts so that you do not go bankrupt before 30. Very important, START SAVING! If you start to save $50 per month, there will be some emergency funds and you have the discipline to save more in the future.

2) Consolidation phase
This is in the middle of your career, your earnings should be more than your expenses. Now you can plan for your retirement and play with some investments (such as stocks, bonds, trust funds). If you're uncomfortable with managing money or just too busy, try investing in a reputable trust fund. KEEP ON SAVING!

3) Spending/Gifting Phase
Now that you are going to retire and retiring, your finances should all be in place. You have enough money in investments to last you until the end. You should have some liquid investment that can be converted to cash quickly for your living expenses. This is when your savings will payoff.

Hope this gives you something for you to think about.

Life cycle investment strategies

Throughout your life, you will need to manage your wealth, eg investment, savings and spending. There will be various phases in your life, depending on your age where you will need to worry about. There are many versions of this but I will refer to two that are basically the same which are:

Version 1

I) Get Started When you start to work early 20's

II) Build and Invest Late 20's to mid 40's

III) Consolidate for future 40's to 50's

IV) Income and Security after 55

Version 2

a) Accumulation phase 20's to mid 40's

b) Consolidation 40's to 50's

c) Spending/Gifting phase after 55

The figure below illustrates the phases in your life with your net worth



When you start off working, you are at the 'Getting Started' phase, where usually you get a job or start your own business after you get out of school or college. You start off with minimal wage and getting into debt (study loans, car, house mortgage, early expenses, helping the parents). This is when you are bright eyed and excited to take on the world.

Then you are at the 'Build and Invest' or 'Accumulation phase' where you getting more experienced at your job and getting some pay raise. This is from your mid 20's to your 40's. You're debts are more manageable and getting repaid, your income is getting higher and you have savings. You start having a family, feed the kids and put them into good schools. Very important! SAVE!!!!! Robert Kiyosaki (I believe) says Pay Youself First!

Now you are at your mid 40's to 50's and you are at your most value at your job with extensive experience. This is the 'Consolidate for the Future' or 'Consolidation' phase. If you're an employee, let's face it, your boss is not gonna promote you unless you are really indispensable. If you have your own business, its not so bad. This is the time where you have your successor lined up awaiting for you to retire. Your debts should have been payed off and your income is at its highest. The kids should be finishing college and starting to work and now you have less expenses to worry about. Your SAVINGS will be at the maximum preparing your self for retirement.

After 55, it is time to retire and reward yourself for all the hardwork in your life. The kids should be having families on their own and hopefully contributing to your golden years. Now, you are basically living off your savings.

In the next couple of entries, We'll talk about each of the phases above and some investment strategy you may want to adopt.

Another perspective on HPY (Annual returns)

Let's use an example of a house. You bought a house 42 years ago for $10,000 and just sold it for $80,000.

If we use the standard way of calculating the HPR, your profit is %700. Woo Hoo! Hold on, what about the past 8 years? Didn't you spend any money to eat?
HPR = 80,000 / 10,000 = 8.0
HPY = HPR - 1
= (8.0 -1) = 7.0 = 700%

The proper way of doing it is to do it below. Now, you've got a more reasonable number which is 5.08%. So, if you're investments takes a long time, annualize them.

HPY = [(HPR)1/n - 1] x 100
= [(8.0)^1/42 - 1] x 100
= (1.050758 - 1) x 100
= (0.050758) x 100
= 5.08% Annually