Individual Investor Life Cycle
Individual investor life cycle indicates the investment behavior of investors over the different ages of their life. The investment decision is based on the age, financial condition, future plans, and risk characteristics of an individual.
Investor mainly invests in getting a return that can compensate for the sacrifice of the present for more future earnings and security. As a financial plan, investors can adopt different insurance policies or reserve cash for the future. Although investor has to take risk of reserving cash or investing the cash they are ready to take some risk according to their risk-taking behavior.
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An investor passes through four different phases in life
- Accumulation Phase
- Consolidation Phase
- Spending Phase
- Gifting Phase
Investor early or middle of their career tries to accumulate funds so that individual can have money to spend in the later phase of their life. Some people accumulate funds to buy a house, car,s or other important assets and some people accumulate for their children’s education costs, to live a peaceful life after retirement.
Funds invested in the early phase of life gives an investor a huge amount of fund which compound over the years
The consolidation phase is the midpoint of their career, in this phase, they earn more, spend more and pay off all their debts. In this phase, moderately high risk is taken by the investor but for capital reservation, some investors prefer lower-risk investors. Individuals invest in the capital market and investment securities.
This phase starts when an individual retires from the 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 a bond, debentures, treasury bills, etc. In this phase, they need some risky investors if they have extra money so that future inflation can be adjusted.
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, and 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 behaves differently and invest in their preferred sector according to their risk-taking behavior.