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What is Lifecycle Investing?

Between 1965 to 2015, the population of Singapore had increased from 1.9 million to 5.5 million. The number of citizens aged 65 and above was estimated to be 440,000 back in 2015 and is expected to more than double to 900,000 in 2030. The Department of Statistics of Singapore also reported that the average Singaporean citizen can expect to live to 83.

Greying populations is not a phenomenon that is only playing out in Singapore. China reversed its one-child policy in 2015 to tackle its ageing population. Japan and Europe also contend with greying populations; less young people working equate to less taxes and resources for the state to take care of its citizens. To that end, lifecycle investing has gained increasing popularity and attention in recent years.

Essentially lifecycle investing is investing for retirement. The general principle is that people should hold more equities (higher risk assets) when they are young and a greater proportion in fixed income assets (lower risk) as they age. For people in their early twenties, they should adopt a more aggressive strategy since they have at least 40 years to retirement. This means they can ride out multiple market downturns and upswings, and also have a lifetime of earnings ahead of them. The goal of investing should be capital growth.

Whereas as investors age towards retirement, they have to start positioning their portfolio towards income growth. The proportion of equities held should fall relative to assets such as bonds, real estate investment trusts and high dividend stocks which can provide regular income to support investors who may no longer be regularly employed.

There are exhaustive articles and research online that expound how lifecycle investing should be carried out. Authors Ian Ayres and Barry Nalebuff from the Yale University even go as far as to suggest strategies in which young people should borrow money to gain exposure to equities to reduce risk and improve returns of their retirement portfolios in their 2010 book, Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio. Rather than focus on specifics to retirement planning which will no doubt differ between each of us, let us review two broad guidelines in lifecycle investing in my next article.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.