Financial plans and investment needs are as different as each individual. Investment needs change over a person’s life cycle. How individual structure their financial plan should be related to their age, financial status, future plans, risk aversion characteristics and needs.
Before embarking on an investment program, we need to make sure others need are satisfied. No serious investment plan should be started until a potential investor has adequate income to cover living expenses and has a safety net should the unexpected occur.
Insurance
Life insurance should be a component of any financial plan. Life insurance protects loved ones against financial hardship should death occur before financial goals are met. The death benefit paid by the insurance company can help pay medical bills and funeral expenses and provide cash that family members can use to maintain their lifestyle , retire debt , or invest for future needs ( for example , children’s education , spouse retirement). Therefore, one of the first steps in developing a financial plan is to purchase adequate life insurance coverage.
Insurance can also serve more immediate purposes, including being a means to meet long-term goals, such as retirement planning. On reaching retirement age , you can receive the cash or surrender value of your life insurance policy and use the proceeds to supplement your retirement style or for estate planning purposes.
Insurance coverage also provides protection against other uncertainties. Health insurance helps to pay medical bills. Disability insurance provides continue income should a person become unable to work. Automobile and home (or rental) insurance provides protection against accidents and damage to cars and residences.
Although nobody ever expects to use his or her insurance coverage, a first step in a sound financial plan is to have adequate coverage “just in case”. Lack of insurance coverage can ruin the best- planned investment program.
Cash Reserve
Emergencies, job layoffs and unforeseen expenses might happen, and good investment opportunities might emerge. It is important to have a cash reserve to help meet these occasions. In addition to providing a safety cushion, a cash reserve equal to about six months’ living expenses. Calling it a “cash” reserve does not mean that funds should be in cash; rather, the funds should be in investments you can easily convert to cash with little chance of a loss in value (high liquidity). Money market or short-term bond mutual funds and bank accounts are appropriate vehicles for the cash reserve.
Similar to the financial plan, an investor’s insurance and cash reserve needs will change over his or her life. The need for disability insurance declines when a person retires. In contrast, other insurance, such as supplemental medical insurance coverage or long term care insurance may become more important.
Friday, August 21, 2009
Wednesday, August 19, 2009
Life Cycle Investment Strategy
Assuming the basis insurance and cash reserve needs are met, individuals can start a serious investment program with their savings. Because of changes in their net worth and risk tolerance, individuals’ investment strategy will change over their lifetime.
In the following section, we review various phases in the investment life cycle. Although each individual’s needs and preferences are different, some general traits affect most investors over the life cycle. The four life cycle phases in investment program are
1. Accumulation phase
2. Consolidation phase
3. Spending phase
4. Gifting phase
Accumulation phase
Individuals in the early-to-middle years of their working careers are in the accumulation phase. As the name implies, these individuals are attempting to accumulate assets to satisfy fairly immediate needs (for example, a down payment for a house) or longer-term goals (children’s college education and retirement fund).
Typically, their net worth is small, and debt from car loans or housing loan may be heavy as compare to individual income.
As a result of their typically long investment horizon and their future earning ability, individuals in the accumulation phase are willing to make relatively high-risk investments in the hope of making above-average nominal returns over time.
Here we must emphasize the wisdom of investing early and regularly in one’s life. Funds invested in early life-cycle phases, with return compounding over time, will reap financial benefits during later phases.
Consolidation phase
Individuals in the consolidation phase are typically past the midpoint of their careers, have paid off much or all of their outstanding debts , and perhaps have paid , or have the assets to pay , their children’s college bills.
Earning exceeds expenses, so the excess can be invested to provide for future retirement or estate planning needs. The typical investment horizon for this phase is still long (20 to 30 years), so moderately high risk investments are attractive. At the same time, because individuals in this phase are concerned about capital preservation, they do not want to take very large risks that may put their current nest of egg in jeopardy.
Spending Phase
The spending phase typically begins when individuals retire. Living expenses are covered by social security income and income from prior investments.
Because their earning years have concluded (although some retirees take part-time position or do consulting work), they seek greater protection of their capital. At the same time, they must balance their desire to preserve the nominal value of their savings with the need to protect themselves against a decline in the real value of their savings due to inflation.
As an average individual after retirement has a life expectancy of 20 - 30 years ,thus, although their overall portfolio may be less risky than in consolidation phase, they still need some risky growth investments, such as common stocks, for inflation (purchasing power) protection.
The transition into the spending phase requires a sometimes difficult change in mindset; throughout our working life, we are trying to save; suddenly we can spend.
We tend to think that if we spend less, say 4 percent of our accumulated funds annually instead of 5, 6 or 7 percent; our wealth will last far longer. But a bear market early in our retirement can greatly reduce our accumulated funds. Fortunately , there are planning tools that can give a realistic view of what can happen to our retirement funds should markets fall early in our retirement years; this insight can assist in budgeting and planning to minimize the chance of spending ( or losing ) all the saved retirement funds.
Annuities, which transfer risk from the individual to the annuity firm (most likely an insurance company), are another possibility. With an annuity, the recipient receives a guaranteed, life long stream of income.
Gifting phase
The gifting phase is similar to, and may be concurrent with, the spending phase. In this stage, individuals believe they have sufficient income and assets to cover their current and future expenses while maintaining a reserve for uncertainties. Excess assets can be used to provide financial assistance to relatives or friends and to establish charitable trusts.
Life cycle Investment Goals
During the investment life cycle, individual have a variety of financial goals. Near term, high priority goals are shorter-term financial objectives that individuals set to fund purchases that are personally important to them, such as accumulating funds to make a house down payment, buy a new car or take a trip. Parents with teenage children may have a near term, high priority goal to accumulate funds to help pay college expenses. Because of the emotional importance of these goals and their short time horizon, high risk investments are not usually considered suitable for achieving them.
Long term, high-priority goals typically include some form of financial independence, such as the ability to retire at a certain age. Because of their long-term nature, higher-risk investment can be used to help meet these objectives.
Lower-priority goals are just that – it might be nice to meet these objectives, but it is not critical. Examples include the ability to purchase new car every few years, redecorate the home with expensive furnishings, or take a long, luxurious vacation. A well-developed policy statement considers these diverse goals over an investor’s lifetime.
In the following section, we review various phases in the investment life cycle. Although each individual’s needs and preferences are different, some general traits affect most investors over the life cycle. The four life cycle phases in investment program are
1. Accumulation phase
2. Consolidation phase
3. Spending phase
4. Gifting phase
Accumulation phase
Individuals in the early-to-middle years of their working careers are in the accumulation phase. As the name implies, these individuals are attempting to accumulate assets to satisfy fairly immediate needs (for example, a down payment for a house) or longer-term goals (children’s college education and retirement fund).
Typically, their net worth is small, and debt from car loans or housing loan may be heavy as compare to individual income.
As a result of their typically long investment horizon and their future earning ability, individuals in the accumulation phase are willing to make relatively high-risk investments in the hope of making above-average nominal returns over time.
Here we must emphasize the wisdom of investing early and regularly in one’s life. Funds invested in early life-cycle phases, with return compounding over time, will reap financial benefits during later phases.
Consolidation phase
Individuals in the consolidation phase are typically past the midpoint of their careers, have paid off much or all of their outstanding debts , and perhaps have paid , or have the assets to pay , their children’s college bills.
Earning exceeds expenses, so the excess can be invested to provide for future retirement or estate planning needs. The typical investment horizon for this phase is still long (20 to 30 years), so moderately high risk investments are attractive. At the same time, because individuals in this phase are concerned about capital preservation, they do not want to take very large risks that may put their current nest of egg in jeopardy.
Spending Phase
The spending phase typically begins when individuals retire. Living expenses are covered by social security income and income from prior investments.
Because their earning years have concluded (although some retirees take part-time position or do consulting work), they seek greater protection of their capital. At the same time, they must balance their desire to preserve the nominal value of their savings with the need to protect themselves against a decline in the real value of their savings due to inflation.
As an average individual after retirement has a life expectancy of 20 - 30 years ,thus, although their overall portfolio may be less risky than in consolidation phase, they still need some risky growth investments, such as common stocks, for inflation (purchasing power) protection.
The transition into the spending phase requires a sometimes difficult change in mindset; throughout our working life, we are trying to save; suddenly we can spend.
We tend to think that if we spend less, say 4 percent of our accumulated funds annually instead of 5, 6 or 7 percent; our wealth will last far longer. But a bear market early in our retirement can greatly reduce our accumulated funds. Fortunately , there are planning tools that can give a realistic view of what can happen to our retirement funds should markets fall early in our retirement years; this insight can assist in budgeting and planning to minimize the chance of spending ( or losing ) all the saved retirement funds.
Annuities, which transfer risk from the individual to the annuity firm (most likely an insurance company), are another possibility. With an annuity, the recipient receives a guaranteed, life long stream of income.
Gifting phase
The gifting phase is similar to, and may be concurrent with, the spending phase. In this stage, individuals believe they have sufficient income and assets to cover their current and future expenses while maintaining a reserve for uncertainties. Excess assets can be used to provide financial assistance to relatives or friends and to establish charitable trusts.
Life cycle Investment Goals
During the investment life cycle, individual have a variety of financial goals. Near term, high priority goals are shorter-term financial objectives that individuals set to fund purchases that are personally important to them, such as accumulating funds to make a house down payment, buy a new car or take a trip. Parents with teenage children may have a near term, high priority goal to accumulate funds to help pay college expenses. Because of the emotional importance of these goals and their short time horizon, high risk investments are not usually considered suitable for achieving them.
Long term, high-priority goals typically include some form of financial independence, such as the ability to retire at a certain age. Because of their long-term nature, higher-risk investment can be used to help meet these objectives.
Lower-priority goals are just that – it might be nice to meet these objectives, but it is not critical. Examples include the ability to purchase new car every few years, redecorate the home with expensive furnishings, or take a long, luxurious vacation. A well-developed policy statement considers these diverse goals over an investor’s lifetime.
Tuesday, August 18, 2009
Investment In Life
From womb to tomb, an individual aggressively investing time and money, seeking for a future return.
Time investment take the effort of learning up new knowledge, spending quality time with family and coaching next generation.
Monetary investment take the effort of an investment strategy to invest hard earn money to reap an expected return to support future financial needs.
Return can be in the form of tangible or intangible return.
Tangible return will be an increase in real monetary wealth. For example: an increase in value in saving account and tangible asset such as houses and other financial instrument.
Intangible return will be an increase in knowledge capital and satisfaction through career advancement, happiness, recognition and contribution to the society.
Investment and return priority change over a person’s life cycle. The 5 phases in life cycle are
1. Growth phase
2. Accumulation phase
3. Consolidation phase
4. Spending phase
5. Gifting phase
Growth phase
This phase covers the day an individual is born until graduation with the objective of knowledge capital accumulation.
Parents are scarifying through dedicated effort in raising up children through care taking and providing sufficient education. The best return is satisfaction on observing the children grow healthier, learning up knowledge capital and become a useful person with successful career in the future.
An individual will focus on learning up knowledge capital to prepare for a successful future endeavor.
Accumulation phase
An individual in early to mid years of working careers, accumulating assets to satisfy immediate needs and long term goal.
In this phase, an individual entering job market, investing time and effort to earn an income for a living.
Dedicated to daily job activities, picking up new knowledge and moving up corporate ladder with income generated from successful career to support immediate needs (daily expenses, down payment for house and car) and long term goals (children’s tertiary education and retirement fund)
Besides daily job activities, effort on learning up financial knowledge to invest excess income is crucial. In this phase, we must emphasize the wisdom of investing early and regularly in one’s life. Funds invested in early life-cycle phases, with returns compounding over time, will reap financial benefits during later phases to support future consolidation, spending and gifting phases.
Successful investment of excess income will able to shorten accumulation phase and move into next stages towards financial independent.
Consolidation phase
In this phase, an individual typically past the midpoint of their careers, have paid off much or all of their outstanding debts and have sufficient assets to support long term goals.
The key focus is on future retirement and estate planning with priority on investing excess income for sustainable growth in assets to achieve financial independent after entering spending and gifting phases.
Spending phase
This phase begins typically after retirement. Living expenses are covered by passive income, an income generated from prior investment.
Priority on passive investment strategy to generate an annuity with sufficient income and assets to cover current and future expenses while maintaining a reserve for uncertainties, base on prefer life style.
Gifting phase
Gifting phase is an extension from spending phases where excess income from annuity generated from investment is used to provide financial assistance to relatives or friends , to support charity activities for others in need.
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