Choose a Risk Posture

Look at the stage in the investor life cycle and condition your risk posture accordingly. The following discussion is helpful in this respect.

The investor life cycle is typically divided into four stages as follows:

Stage I: Early Career: At the beginning of his career, an individual’s net worth is small –it may even be negative if he has taken educational loans which are not been repaid. However, his income exceeds his expenses. More important, he expects a larger future income over an extended period of time as his career advances. Given his long term investment horizon, he is willing to accept higher risk in anticipation of higher returns.

Stage II: Mid Career: By the time the individual reaches this stage he would have accumulated some wealth. A well prepared individual would have a satisfactory insurance cover, a tangible investment in a home, and a reasonable base of financial assets. The investment horizon is still long (one is 15 to 20 years away from retirement) and hence high return – high risk investments still make sense. Yet, during this stage, preservation of capital acquires some importance and the individual may want to moderate his risk exposure in some ways.

Stage III: Late Career: The individual has virtually no debt or mortgage on his home and has a reasonably solid base of other assets as well. Further, his savings level is high, thanks to an expanded income and a diminution of expenses. Nevertheless, a significantly reduced investment horizon (5-10 years) induces conservation. Preservation of capital becomes an important concern and, hence, risk exposure is reduced.

Stage IV: Retirement: At this stage, investment becomes the principal source of sustenance. Even though his investment income may be comfortable, the vagaries of inflation and the unpredictable medical expenses induce a great deal of conservatism. This means that preservation of capital may become the over riding concern and, hence risk is mitigated further.

Investment Horizon versus Living Horizon:

The general recommendation that a person should gradually tilt his portfolio in favor of bonds as he advances in age implicitly assumes that a person’s investment horizon is more or less the same as his living horizon. This may often not be true because for most people the investment horizon may be longer, indeed much longer, than their living horizon.

For example, if you are 45 years old and have a 10 year old son, your investment horizon is not just another 30 years (your future life expectancy), but close to 70 years that your son may live. Even if you are 70 years old, your investment horizon may be 70 years if you have young grandchildren that you care for a charitable cause that you want to contribute to.

“Most investors” actual time horizons for investments are quite long – 20 years, 30 years, and often 50 years or more because the investments they pass on to others will continue to be active well past the period of their own lives.

Some experts argue you should not change your investments just because you have retired or reached a certain age. Maintain the strategy you have set for yourself if you afford to do it.

Tiptoe through the World of Precious Objects:

Precious objects include gold, silver, precious stones, and art objects. While they have appeal as objects of ornamentation or decoration they do not have attractive investment properties for the following reasons:

1. They do not provide regular income.
2. The appreciation in their value is erratic and often not substantial.
3. There is no tax advantage associated with them
4. Barring gold and silver, the other precious objects do not enjoy high liquidity. It may not be easy to sell them without giving major price concessions.

In general, it makes sense to invest in precious objects provided you can buy from reliable sources and have the ability to assess their value. Further, you should have the capacity to hold them for a long period. As most investors do not satisfy these conditions, they are advised to limit their investment in precious objects.