Investor Life Cycles

Investor Life Cycles

Friendly-Financial-Coach

This week I’ll be going back to some financial basics by looking at the classic yet ever-relevant investor life cycle. Simply, this theory states that we go through four investment life phases, specifically; Accumulation, Consolidation, Financial Independence and Gifting. Since this theory was created, there has been a large influx in post-secondary education enrolment and I’ve therefore added another cycle stage, that of the Student. It’s also important to note that this is a generalization and due to certain circumstances we may not experience all these stages.

 

Stage 1: Student

This stage is characterized by low income and a vast accumulation of student debt. Often a student will live at home and fortunately have lower expenses, but this is always not the case. Low income is a symptom of the student’s limited work experience and/or part-time working hours. During this stage, the student will accrue large amounts of student debt and make only minimum payments on it. Often income will be less than expenses and therefore the individual will not be able to invest.

 

Stage 2: Accumulation

The individual has now graduated and has just entered into the workforce. Income is still low, but it’s greater than the student phase and will gradually increase with experience. At this point, the individual will have few assets marked with growing debt levels. House purchases will add to debt levels and child rearing will reduce household income. At this point, individuals may or may not be investing much, but can utilize long-term investment horizons that can offer greater returns.

Stage 3: Consolidation

At this stage income is now greater than expenses as individuals are paid more. Expenses will also be reduced as debt has been gradually paid down and children have left home. At this point the individual’s investment portfolio has grown in size and they have an increased amount of assets. Investment horizons are reduced and investments are now balanced with ones that generate income.

Stage 4: Financial Independence

At this point the individual is now retired and living expenses are financed mainly through investments and pension income. Income is reduced and likely so is their lifestyle. Investment horizons have also been heavily reduced to 10-20 years and they are likely invested in low-risk investments like GICs, Bonds and stable investments.

Stage 5: Gifting

Now financial assets outweigh needs and the individual will share their wealth with their family, friends or charitable organizations. In this stage the individual may be alive or assets passed through inheritance.
As always, I would love to hear your input and if you have any questions please contact me at info@ffcoach.ca. Thanks for reading!