While the life cycle guide is a useful approach to financial planning, another somewhat supplementary approach that many experts recommend is that of the wealth cycle. The life cycle approach groups all investors in age group, irrespective of their financial condition. In fact each client is so unique, with a unique combination of circumstances, resources, attitudes and needs, that any attempt at grouping them by age has its drawbacks, especially if the attempt is to identify the one investment strategy that works best for the entire group. In the light of this fact, a different classification holds prominence, in which investors are classified based on the wealth cycle stage they are in to.
The wealth cycle stages of an individual can be classified as:
1) Accumulation Stage
In this phase, investors look to build wealth for their financial goals, which are still sometime away. Typical client needs such as saving for retirement, acquiring assets and providing for children’s education & marriage are distant and the investor’s primary aim is long-term wealth accumulation. Because of the investor’s high-risk appetite, long-term equity linked products are suggested.
2) Transition Stage
During this stage, one or more of the investors’ goals are approaching or about to be approached in clear short-term future. Because of the investor’s lower risk-appetite, liquid and medium-term investment is suggested.
3) Reaping Stage
This is the cashing out stage, because the goal and purpose towards which the investors have been investing have arrived. In essence, this is the time to reap the harvest they have sown. Therefore, this is a stage of utilizing the money accumulated for the desired goals. Because of the investor’s low risk-appetite, preference should be given to investment in income and debt products.
4) Inter-generational Transfer Stage
In this stage, investors need to start thinking about how to share their wealth, either during their own lifetime, or by bequeathing through their will after their lifetime. Such transfer of wealth may have to be done in favour of different categories of beneficiaries such as the investor’s children or grandchildren, or to family or charitable trust or causes. Therefore, one should keep oneself well informed about the legal and financial aspects of estate planning. Because of the low liquidity needs and ability to take risk, long-term investment is suggested.
5) Sudden Wealth Surge
This stage is one where due to certain event investors receive sudden flow, which increases their wealth significantly. These events may be like winning lottery/contests, inheriting estate, huge appreciation of shares held, etc. In this stage, wealth preservation is the key priority.