Chapter 2 Accumulation Phase Individuals in the early-to-middle years of their working careers are in the accumulation phase.

. As the name implies, these individuals are attempting to accumulate assets to satisfy fairly immediate needs (for example, a down payment for a house) or longer-term goals (childrens college education, retirement). ypically, their net worth is small, and de!t from car loans or their own past college loans may !e heavy. As a result of their typically long investment time hori"on and their future earning a!ility, individuals in the accumulation phase are willing to make relatively high-risk investments in the hopes of making a!ove average nominal returns over time. Consolidation Phase Individuals in the consolidation phase are typically past the midpoint of their careers, have paid off much or all of their outstanding de!ts, and perhaps have paid, or have the assets to pay, their childrens college !ills. #arnings exceed expenses, so the excess can !e invested to provide for future retirement or estate planning needs. he typical investment hori"on for this phase is still long ($% to &% years), so moderately high risk investments are attractive. At the same time, !ecause individuals in this phase are concerned a!out capital preservation, they do not want to take very large risks that may put their current nest egg in 'eopardy. Spending Phase he spending phase typically !egins when individuals retire. (iving expenses are covered !y social security income and income from prior investments, including employer pension plans. )ecause their earning years have concluded (although some retirees take parttime positions or do consulting work), they seek greater protection of their capital. At the same time, they must !alance their desire to preserve the nominal value of their savings with the need to protect themselves against a decline in the real value of their savings due to inflation. he average *+-year-old person in the ,nited -tates has a life expectancy of a!out $% years. hus, although their overall portfolio may !e less risky than in the consolidation phase, they still need some risky growth investments, such as common stocks, for inflation (purchasing power) protection. Gifting Phase he gifting phase is similar to, and may !e concurrent with, the spending phase. In this stage, individuals !elieve they have sufficient income and assets to cover their expenses while maintaining a reserve for uncertainties. #xcess assets can !e used to provide financial assistance to relatives or friends, to esta!lish charita!le trusts, or to fund trusts as an estate planning tool to minimi"e estate taxes. Life Cycle .uring the investment life cycle, individuals have a variety of financial goals. Near-terms are shorter-term financial o!'ectives that individuals set to fund purchases that are personally important to them, such as accumulating funds to make a house down payment, !uy a new car, or take a trip. /arents with teenage children may have a near-term, high priority goal to accumulate funds to help pay college expenses. )ecause of the emotional importance of these goals and their short time hori"on, high-risk investments are not usually considered suita!le for achieving them. Long-term ypically include some form of financial independence, such as the a!ility to retire at a certain age. )ecause of their long-term nature, higher-risk investments can !e used to help meet these o!'ectives.

Lower-priority goals are 'ust that0it might !e nice to meet these o!'ectives, !ut it is not critical. #xamples include the a!ility to purchase a new car every few years, redecorate the home with expensive furnishings, or take a long, luxurious vacation. Portfolio Management he process of managing an investment portfolio never stops. 1nce the funds are initially invested according to the plan, the real work !egins in monitoring and updating the status of the portfolio and the investors needs. Policy Statement he policy statement is a road map in it, investors specify the types of risks they are willing to take and their investment goals and constraints. n!estment strategy #conomies are dynamic2 they are affected !y numerous industry struggles, politics, and changing demographics and social attitudes. hus, the portfolio will re3uire constant monitoring and updating to reflect changes in financial market expectations. 4e examine the process of evaluating. Construct the Portfolio 4ith the investors policy statement and financial market forecasts as input, the advisors implement the investment strategy and determine how to allocate availa!le funds across different countries, asset classes, and securities. his involves constructing a portfolio that will minimi"e the investors risks while meeting the needs specified in the policy statement. 5inancial theory fre3uently assists portfolio construction. Continual Monitoring of the investors needs and capital market conditions and, when necessary, updating the policy statement. )ased upon all of this, the investment strategy is modified accordingly. A component of the monitoring process is to evaluate a portfolios performance and compare the relative results to the expectations. n!estors Goal Capital Preser!ation 6apital preservation means that investors want to minimi"e risk of loss usually real terms. hey seek to maintain their purchasing poser. 6apital Appreciation is the o!'ect when the investors want the portfolio to grow is real terms overtime to meet some future need. 6urrent Income is the return o!'ective, the investors want to the portfolio to concentrate on generating income other than capital gains. otal Income he total income similar to that of capital appreciation normally the investors want the portfolio to grew overtime to meet a future need. n!estment Constrains In addition to the investment o!'ective that sets limits on risk and return, certain other constraints also affect the investment plan. Investment constraints include li3uidity needs, an investment time hori"on, tax factors, legal and regulatory constraints, and uni3ue needs and preferences. Li"uidity Needs An asset is li3uid if it can !e 3uickly converted to cash at a price close to fair market value. 7enerally, assets are more li3uid if many traders are interested in a fairly standardi"ed product. reasury !ills are a highly li3uid security2 real estate.

#ime $ori%on ime hori"on as an investment constraint !riefly entered our earlier discussion of near-term and long-term high-priority goals. A close (!ut not perfect) relationship exists !etween an investors time hori"on, li3uidity needs, and a!ility to handle risk. #a& Concerns Investment planning is complicated !y the tax code2 taxes complicate the situation even more if international investments are part of the portfolio. axa!le income from interest, dividends, or rents is taxa!le at the investors marginal tax rate Legal 'actors )oth the investment process 8 the financial markets are highly regulated su!'ect to numerous causes. At times there legal 8 regulatory factors customs the investment strategy of individuals 8 institutions.