The accumulation phase is usually young adulthood to early middle age. During this phase, assets are accumulated to satisfy immediate needs (a house, a car, furniture, and so forth). There may also be some long-term goals, such as saving for retirement or children's education. Typically during this stage, the individual's net worth is small. Debt management (paying the mortgage, paying for the car, paying on credit cards, paying off college debts) often is the primary consideration.
If an investment program is started when a person is young and has a long time horizon, plus a growing job income, larger risks can theoretically be taken. Normally, the investor can risk loss of principal, as risk tolerance is high and there is no need for a stable investment income because basic spending patterns should be financed out of job income. Real returns are required and inflation protection is desirable.
The consolidation phase typically begins between the ages of 45 and 54. At this stage, debt management gives way to asset accumulation, income tends to be high, and net worth should be growing rapidly. The investment horizon, however, still might be 20-30 years, enabling the acceptance of a moderate amount of risk. At this stage, the individual is in a position to start a serious investment program. His or her income is high and a primary goal should be saving for retirement. The ability to tolerate some loss of principal is still high, although not as high as when the investor was at an earlier stage of life. Furthermore, there is usually little need for current income, because job income should be sufficient for current needs.
Spending / Gifting:
The spending phase begins at retirement. Income declines and it becomes necessary to live off of past investments. During this phase, the investor tends to become less tolerant of risk, but must protect the real purchasing power of income. The gifting phase is when an individual's wealth is large enough and the individual is old enough, so that he or she decides to provide financial assistance to others (children,grandchildren, and charitable institutions). Estate planning may also be important to minimize estate taxes.
At this stage, the need for stable income and reduced risk dominates. The ability to tolerate some loss of principal is still high, although not as high as when the investor was at earlier stages. The current income generated from the portfolio should be enough to meet expense requirements that cannot be met by non-portfolio sources, such as a pension and social security income. It is important that this minimum current income requirement be secure. Inflation protection may be desirable if the projected spread between expenses and non-portfolio income will widen over time due to inflation.
What To Take Away From This
The most important aspect of the investor life cycle is that as one moves through the phases, the asset allocation must be adapted to account for the different requirements and needs of each phase. Understanding what phase you are in is important - ensure you reconcile your own needs with that of the phase as each person is different and one size does not fit all.
Personally, I am in the accumulation phase and am taking a more aggressive stand with my portfolio in terms of my allocation to equities versus fixed income. My dividend investing focus helps with the inflation protection requirements in the accumulation phase as as inflation rises, so do my dividend payments thus shielding me from the negative effects inflation can bring. What phase are you in?