An investment based on the individual phases of your investor’s life is attractive especially for passive management.
Human life has three major phases: childhood and adolescence, adulthood and old age. Investments in funds and life cycle programs work on a similar principle. As in youth and adulthood, you have plenty of time into old age, and at forty you don’t think like a shabby old woman. It is similar with investments.
At a young age, you have a better chance of catching up and compensating for a possible loss during an economically active life than when you are retired.
Investing like in life
Investment programs and life cycle funds are based on the same assumption. At the beginning of the investment, you have most of the funds in a dynamic to risk profile.
During the life cycle, the risk component dissolves in small parts into conservative investments. These represent bonds, bond funds and money market funds. At the end of the investment horizon, funds in the risk component are minimal or non-existent. The vast majority of the value of a fund or program is in conservative investments.
Three-phase investment model
The investment strategy of funds or life cycle programs is divided into three phases. In the first phase, investments are made in stocks and assets with high growth potential, which means a return for the investor. The risk of fluctuations in the value of this investment is balanced by a long investment horizon.
In the second phase, assets are transferred to more conservative investment instruments, which are bonds in the field of investment. This shift between asset classes, such as stocks and bonds, will provide the investor with the maximum possible protection against the fund’s or program’s decline in value from capital market fluctuations and help stabilize the returns achieved.
In the last phase, all assets are transferred to conservative investments. From dynamic forms, such as the already mentioned shares or equity mutual funds, funds are shifted to bonds. This phase is generally the shortest and has been going on for the last few years.
The length of the investment horizon is usually from 20 to 40 years. The actual duration of the investment depends on the age of the investor and his requirements for the payment of funds from the investment program or fund.