Regularly riding a stationary or road cycle is a great way to stay fit. Taking a life cycle approach to investing is also one of the best ways to help stay financially fit.
Life cycle investing works by letting you manage your finances so they match your financial needs and priorities at different life stages.
Life Stage One 鈥� The Savings Years (25-40) Typically, a time of life when expenses are higher and the amount available to invest is lower. During these years you're usually dealing with mortgage payments and the many other expenses of raising a family. You still need to save because money put away early has longer to grow. Now is the time to maximize that growth by contributing to your tax-sheltered Registered Retirement Savings Plan (RRSP). It's also a time when you can take more risk in your non-registered investment choices. Because your time horizon is long, you can afford to pay less attention to market ups and downs. Mutual funds with a strong equity component are a good way to diversify your portfolio by adding high potential equities while reducing the volatility experienced with individual stocks.
Life Stage Two 鈥� The Wealth Building Years (40-60) During this stage, your income is reaching its peak and your expenses (mortgage and other debt) are being reduced or have been eliminated. Now you have more capital to invest. Look first to maximizing your RRSP contributions, including making up any unused contribution room from previous years. The power of compound growth will deliver much more money for you later in retirement. In the early years of Life Stage Two, maintain a healthy proportion of growth investments in your portfolio but as retirement nears, redirect a proportion of your retirement savings into low-risk fixed-income investments like bond mutual funds or Guaranteed Investment Certificates (GICs).
Life Stage Three 鈥� The Retirement Years (60 and over) At this stage, you'll likely need to tap into your accumulated wealth to meet retirement expenses. With average life expectancy rising, your retirement could endure for many years. That makes planning a priority.
That's why it's a good strategy to focus on capital preservation during retirement and move your portfolio into less volatile investments 鈥� but don't totally exclude growth investments that can add significantly to your retirement income and protect against inflation.
Each of the three life cycles requires a different investment strategy 鈥� but always stay diversified. A balanced and diversified portfolio is the best way to withstand short-term market fluctuations and still deliver the growth you need to reach your long-term goals.
Your professional adviser can show you how to stay financially fit with a life cycle approach to investing that works best for your life.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.
