Investment planning: How life stages impact your investments

January 29, 2021 1:05 AM

As investment decisions cannot be the same for all, proper attention to life stages and risk appetite is needed while developing investment portfolios

This is a period for capital appreciation and investment in high growth equities is recommended.

By Gurinder Singh
Investment decision-making is very personal and depends on numerous factors such as age, gender, educational level, marital status, monthly income and life stages. Therefore, the investment portfolio of a young, single, earning individual will be different from a middle aged, married person, which will again be different from a person nearing retirement. But first things first, there are some rules of investments that are common to all.

Start investments early
Investing is not a one-time decision. It is a lifelong process. Investing should begin at the beginning of one’s working life, no matter how small the amount is. But one should not lose heart if she has not started investing till now. At whatever stage of life cycle you are and if you have not started investing, do it now.

Discipline, discipline, discipline….
One of the most crucial parts to this journey of lifelong investing is discipline. Whatever your investment goal, it cannot be achieved without regular, disciplined and rigid habits of saving and investments. Having discussed the standard rules of investment which are common to all individuals, investment portfolios and subsequent asset allocation is dependent on the life stages of investors.

Rule of 100
We can take guidance from the ‘Rule of 100’, a very popular thumb rule for asset allocation based on the life cycle of individuals. In this rule, one has to subtract one’s age from 100 and that proportion becomes the proportion of investments in equity. Therefore, a young, single, working individual at the age of 25 should invest 75% of his portfolio in equities and for a 45-year-old, married person, the investment in equities should not be more than 55%. However, rule of 100 is only an asset allocation tool and depending on the risk tolerance and life stage of an individual, investment portfolios must be designed.

Five life stages
Stage 1– Career commencement: This is a stage when people begin their career, are very young and do not have major responsibilities. Their risk tolerance is high. So, according to the rule of 100 and depending on their age, 75-80% of their portfolio should be invested in equity. The choice of investments should include equity, both direct equity and through equity mutual funds, IPOs, and real-estate.

Stage 2 — Getting married: This is a very important stage in a person’s life when expenses start increasing. The financial responsibilities change and so do the investment objectives. The risk tolerance becomes lower to the previous stage in life. Since the age of marriage is generally between 25-30 years, the investment in equities should now come down to around 70%. This is a period for capital appreciation and investment in high growth equities is recommended.

Stage 3 — Becoming parents: Parenthood is one of the joyous times in one’s lives, but also increases responsibility of a person manifold. The risk appetite becomes lower than the previous two stages and the investment in equities should come down to 60-65%. Investments to the tune of 35-40% have to be considered in debt funds.

Stage 4 – Consolidation: This is the stage between the age of 40-55, when the children start growing older and needs of higher education increase. This is the stage when individuals have to tone down their equity exposure and increase their investments in debt and liquid instruments. A 50/50 exposure in equity and debt instruments should be done. The main concern in this phase is capital preservation and investment in balanced funds is preferred.

Stage 5 — Retirement: This is the last phase of life when individuals have to invest for their retirement. The exposure to equity comes down and investments in liquid funds rise phenomenally.

As investments cannot be the same for all, proper attention to risk appetite should be given while developing investment portfolios. This will make every individual secure his future in the best possible way.

The writer is group vice chancellor, Amity University

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