Investor Life Phases
When assessing your financial position, we look closely at the "phase of life" that you are in, in order to gain some insight into your future financial needs and wants and the risks that you are willing to accept to achieve your goals. We consider that clients usually fall within four (4) "phases of life": -
Foundation Phase
The "Foundation Phase" is the platform upon which the client will establish the pre-requisites required for wealth creation. In this phase, the individual expands upon their education or qualifications intended for their future career aspirations. Often, as this is a foundational stage, investors are young and more tolerant of risk, especially when the world is perceived as one that contains an extended time horizon ahead.
During this phase, the client's financial resources are lowest and their financial uncertainty is highest. Whilst future earnings potential for the investor may be high, current expenses leave very little room to make investments. To toughen the burden, individuals in this phase will usually also face and experience greater financial responsibilities with children, marriage and other such family commitments, that may prohibit the ability to expand one's wealth accumulation.
Often during this "phase of life" the individual starts to look at the steps necessary to provide for their retirement. The role of the Financial Planner in this "phase of life" is to show the individual what goals are achievable, how they are achievable and what steps must be taken to help achieve these goals.
Accumulation Phase
The "Accumulation Phase" lies around the period of young adulthood to early middle age. In this phase, financial resources are accumulated to meet immediate needs and these may include, for example, a house, a car, furniture and so forth. Also on the horizon in this phase may be some long-term goals, such as saving for retirement or the education of children. In this period, management of the small net worth is crucial and debt management (paying the mortgage, paying for the car, paying off credit cards, paying off university debts) often forms a significant part of this phase.
As the individual graduates from the Foundation phase, they will usually begin to reap the rewards of their efforts. During the accumulation phase, the investor's earnings will usually increase the most and the returns from both their Foundation phase and their continuing investments will also grow significantly. As the individual's income increases and their expenses grow the gap between them should widen, thereby allowing for greater wealth accumulation. Usually, the accumulation phase allows for higher levels of risk tolerance, given increasing wealth and relatively long investment horizon.
Maintenance Phase
The "Maintenance Phase" is where the individual seeks to maintain their current standard of living while protecting the investments they have made. Usually, during the maintenance phase, the investor is nearing retirement and will have a substantial portion of their income covering the expenses needed to grow their investment portfolio. The investor is preparing to no longer rely on an earned income to meet daily living expenses and so the focus will turn to the reduction of expenses and the preservation of financial security and wealth.
At this phase, the investor's tolerance to risk will begin to decline and the focus of the investor's portfolio will shift from growth to price stability. The main challenge for the investor in this phase will be to focus on maintaining wealth and outperforming inflation and increasing costs.
Distribution Phase
The "Distribution Phase" is also called the retirement phase. This is where the individual has ceased full-time employment and relies on their investment portfolio. The focus is to transfer the individual's financial resources in the most tax-efficient manner possible. Whilst the portfolio will usually continue to play its fundamental role of meeting the investor's ongoing needs, the individual will be focused on achieving the most tax-effective and efficient transfer of assets to their heirs and beneficiaries while protecting their income. Estate Planning, the creation of Legal Trusts and other Legal Entities and Foundations will often occur during this "phase of life". The role of the Financial Advisor here will be to assist the investor to address the investor's new objectives, which may extend to include needs and objectives of the beneficiary or beneficiaries.
There is very little we can do to stand in the way of mortality and so it is most crucial for investors to determine their stage of life and investment phase, so that a timely and effective Financial Plan can be implemented.
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