Investor Life Cycle
Session 6
Marketing of Financial Services
Learning Objectives – Session 4
• At the end of the session you will able
• to identify stages in investors lifecycle
• to explain the characteristics and challenges
across the stages in investors lifecycle
• To identify appropriate products appropriate
to customer’s life stage
Your personal needs and the criteria for choosing investments change
over time.
As person’s profile changes, your investments will also need to change.
Every person asks these
questions…..
1. How much of their income should they save for
the future?
2. What risks should they insure against?
3. How should they invest what they save?
4. Should they buy or rent a house?
5. Should they buy house for retirement /
investments purposes?
6. Should they get a fixed-rate mortgage or an
adjustable-rate mortgage?
Three Broad phases in Individual’s life ….
Chandra, Abhijeet. (2008). Decision Making in the Stock Market: Incorporating
Psychology with Finance.
Probability of Becoming
Unemployed in the Following Year
….
Source: - Choi, Sekyu, Alexandre Janiak, and Benjamín Villena-Roldán, “Unemployment, Participation and Worker
Flows Over the Life-Cycle,” Barcelona GSE Working Paper No. 617, March 2012.
Source: Life cycle Investing Profiles, Michigan State University
https://www.canr.msu.edu/uploads/234/69598/life_cycle_investing_profiles.pdf?language_id=1
The life cycle theory of savings suggests that people
prefer smooth consumption over their lifetime. Workers
can smooth their consumption by borrowing while they
are young, saving in middle age, and "dissaving" during
retirement.
Source: - Scott A. Wolla, "Smoothing the Path: Balancing Debt, Income, and Saving for the
Future," Page One Economics®, November 2014
Wealth in the Life-Cycle
Source: - MODIGLIANI, F. (1970), “The life-cycle hypothesis of saving and intercountry differences in the
saving ratio”, in W.A. Eltis, M.F.G. Scott and J.N. Wolfe eds, Induction, Growth, and Trade: Essays in
Honour of Sir Roy Harrod, Clarendon Press, Oxford, pp. 197-225
Vanguard’s Life-Cycle Investing
Model
(Goal Based Investing)
The ratio of portfolio income Vanguard’s Life-Cycle Investing
drawn during retirement to Model – Factors considered for
the final-year salary from the
accumulation years Planning investments
(Goal Based Investing)
aversion to
uncertainty of
outcomes
how the investor perceives short-
term market losses.
how the investor perceives a fall in income
the preference to consume below a physiological threshold.
now versus later
Does the Life-cycle theory
happen in reality?
• Present focus bias – People can find it hard to value
income a long time in the future
• Planning for retirement requires effort, forward thinking
and knowledge of financial instruments such as
pensions.
• People may prefer to procrastinate – even though they
know they should save more – and so saving gets put
off.
Assumptions behind life cycle
investing …..
• It assumes people run down wealth in old age, but often this doesn’t happen as people
would like to pass on inherited wealth to children. Also, there can be an attachment
to wealth and an unwillingness to run it down.
• It assumes people are rational and forward planning. Behavioural economics suggests
many people have motivations to avoid planning.
• People may lack the self-control to reduce spending now and save more for future.
• Life-cycle is easier for people on high incomes. They are more likely to have
financial knowledge, also they have the ‘luxury’ of being able to save. People on low-
incomes, with high credit card debts, may feel there is no disposable income to save.
• Rather than smoothing out consumption, individuals may prefer to smooth out
leisure – working fewer hours during working age, and continuing to work part-time
in retirement.
• Government means-tested benefits for old-age people may provide an incentive not to
save because lower savings will lead to more social security payments.
Financial Products and Investor Life
stages …
• Accumulation
• Life Insurance
• Retirement
• Credit Cards • Estate Planning
• Consumption credits
• Housing loans
• Annuity Products
• Home loan insurance • Reverse Mortgages
• Rental deposit loans
• Pension Products
• Tax Planning
• Mutual Funds • Fixed Income products
• Consolidation
• Additional Insurance
• Advisory Services
• General Insurance
• Portfolio Management services
• Tax Planning
• Wealth Management
• Pension Products
Financial Prudence is missing even
in developed countries like USA …..
Risky Assets as a Percent of Total Investment for Households
that Hold Risky Assets
Source: - Investing over the Life Cycle: One Size Doesn’t Fit All By Tim Sablik,
https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/economic_brief/2014/pdf/eb_14-
10.pdf
