Investing for different life stages

Posted: 23 October 2019 9:03 am
News

Left: A piggy bank and an alarm clock. Right: ETF expert Adam O'Connor.

From building wealth in your 20s to living well in retirement, ETF expert Adam O'Connor takes a look at how you can match your investment strategies with your life stage.

As you move through life, your financial goals and needs will change – which can also have an impact on your investments. Think about it like this: when you're just entering the workforce, your financial circumstances and investment objectives will be very different compared to 40 years later, when you may be approaching retirement.

As such, it's important to consider how you'll adapt to meet these needs at life's various stages, and the investments that might give you the best chance of reaching your financial goals.

Exchange Traded Funds (ETFs) can be particularly suited to these different life stages because they give you a way to gain diversified exposure to a portfolio of securities such as equities, bonds or cash in a simple, single trade on the ASX.

This gives you an opportunity to choose a combination of different ETFs across different asset classes to help build a robust and diversified investment portfolio that is tailored to your current investment objectives.

ETFs can be broadly broken down into three categories, based on the purpose behind investing in them: building a core, diversification and generating income. So let's take a look at how these categories can also loosely marry up with different life stages.

Stage 1: Starting out

A famous Chinese proverb says that "A journey of a thousand miles begins with a single step". Building your first investment portfolio can certainly be daunting, but you are young, and time is on your side.

Chances are you've recently entered the workforce. You may have a bit saved or be looking to invest a small amount of your income week to week. But while you may feel your initial balance is small, remember two things:

  1. Some people say that compounding is the eighth wonder of the world – so starting sooner can have a significant positive impact on your wealth in the future.
  2. You have a long investment horizon – meaning you have time to weather market cycles as you build your wealth.

In establishing your investment portfolio, developing a "core" should be the priority – starting with cost-effective, broadly diversified investments that establish a bedrock on which future investments can be built.

ETFs offer a way to get started, with one fund (and one trade) providing access to a portfolio of securities, for example, a portfolio of the largest 200 Australian companies. Investing in low-cost, passive ETFs can also help reduce the impact of investment fees on your returns.

And with ETFs, you don't need a big amount to invest – you can start with as little as $500, and add to that over time.

Stage 2 – The Accumulation Years

By now you might have a better job that's paying you more money. And the investment portfolio you started earlier (and have been steadily building) may have grown into something more substantial.

It's also a time when you may have dependents or a mortgage. Your outgoings are likely to be higher, and you've probably started to become more conscious of planning for the future.

Many of the takeaways for early starters still apply to investors in these years: you are accumulating wealth for tomorrow.

But once you've established a core and are looking to build the overall value of your portfolio, you can consider diversifying by adding additional investments. You might like to look at global markets in different sectors (e.g. technology or healthcare) or investment themes/styles (e.g. ESG).

As you're likely to have more capital to invest at this life stage, diversification will help to reduce risk in your investments as it ensures not all of your returns come from the same sources and are influenced by the same factors.

One strategy to consider is what's known as a core-satellite strategy, which involves building a solid long-term core portfolio and tactically adding smaller positions around that. Adding global companies to your "core" shares portfolio, for example, can help diversify your portfolio, while adding smaller "satellite" exposures targeting potential growth areas, such as investment in technology sectors, or regions such as Asia or India, may help boost returns.

ETFs are well-suited for both core and also satellite investment, as they typically are highly diversified, which can help mitigate some of the risks associated with an individual share performing poorly.

Stage 3 – Pre-retirement/Accumulation

Your focus now is potentially going to be on preparing for your retirement years. With a shorter time horizon, you might look to start rebalancing your portfolio and seeking more capital stability – reducing exposures to equities and increasing your allocation to less volatile assets such as bonds and cash which can help smooth the investment ride and better prepare your portfolio for potential sell-offs in the share market.

ETFs can make such rebalancing straightforward, as they are an efficient way to access not only shares, but also these lower-risk, more defensive assets.

Stage 4 - Retirement

Retirement can last a long time, and objectives when first going into retirement can be very different from the later stages. You may have ceased working or transitioned out of full-time employment and may now be relying on your investments for income or drawing down from your superannuation.

With no salary to count on, your investments (including super) will likely provide the bulk of your income in retirement. At this stage, you can look to ETFs that are more defensive and income-generating, and even reposition your equities portfolio into funds with specific investment objectives aimed towards generating income.

What can we learn from this type of investing?

While investing can seem daunting, putting in the effort to get your strategy right gives you the best chance of reaching your financial goals. Once you work out what life stage you're at, there are many options to help you get your investments sorted – and ETFs are a good place to start.

Adam O'Connor is a member of the BetaShares Distribution team responsible for supporting institutional and intermediary broker and adviser channels. Prior to joining BetaShares, Adam worked in stockbroking and advisory with Bell Potter Securities. Adam holds a Bachelor of Laws with Honours and a Bachelor of Business (Finance) from Queensland University of Technology. Adam also holds a Diploma of Stockbroking from Deakin University and is an accredited Financial Adviser in Securities and Managed Investments and Superannuation.

Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder have taken into account your personal circumstances. You should seek professional advice and read the offer document for any investment product before making any further decisions based on this information.

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