Individual Investor Life Cycle
Individual investor life cycle indicates the investment behavior of investor over different age of their life. Investment decision is based on the age, financial condition, future plans and risk characteristics of an individual.
Investor mainly invests for getting return which can compensate the sacrifice of present for more future earnings and security. As a financial plan investor can adapt different insurance policies or reserve cash for future. Although investor have to take risk of reserving cash or investing cash but they are ready to take some risk according to their risk taking behavior.
An investor passes through four different phases in life. These are:
- Accumulation Phase
- Consolidation Phase
- Spending Phase
- Gifting Phase
Accumulation Phase: Investor early or middle to their career tries to accumulate fund so that individual can have money to spend in the later phase of their life. Some people accumulate fund to buy house, car or other important assets and some people accumulate for their children’s education cost, life peaceful life after retirement.
Funds invested in the early phase of life gives an investor a huge amount of fund which is compounding over the years
Consolidation Phase: Consolidation phase is the midpoint of their career, in this phase they earn more, spends more and pay off all their debts. In this phase moderately high risk taken by the investor but for capital reservation some investor prefer lower risk investor. Individual invest in the capital market and investment securities.
Spending Phase: This phase starts when an individual retire from job. Their overall portfolio is to be less risky than the consolidation phase; they prefer low risky investment or risk free investment. People prefer fixed income securities like bond, debenture, treasury bills etc. In this phase they need some risky investor if they have extra money so that future inflation can be adjusted.
Gifting Phase: If individuals believe that they have enough extra funds to meet their current and future expenses then they go for gifting money to their friends, family members or establish charitable trusts. These can reduce their income taxes and they also keep some fun for future uncertainties.
Over the different phase investor behave differently and invest in their preferred sector according to their risk taking behavior.