An investor's life is not a static thing. Assuming that you get income from sources other than your investments – like employment or your own business – this income will change as you age. Generally speaking, your income should increase as you get older. This means that, as an investor, you will have the most income when you have the least amount of time to invest. Here we look at what characterizes the various "seasons" of your life as an investor and what actions you should take at each stage.
It is important to note that, although the seasons of your investing life are more or less set like the seasons in a year, you must start as early as possible. If you start investing late in life, you will have a very compressed spring, summer and fall, followed by a very long winter. If you start early, you can enjoy each season to its fullest.
When you are young and just starting to invest, you probably don't have enough disposable income to devote $1,000 a month to investments. You may have only $10 to $100 dollars to spare. The important thing is to invest this small amount regularly. Due to the costs associated with investment and the smaller income you have available in the spring of your investing life, the choices available to you will likely be limited. Look for plans or investments at your local bank that allow you to invest a small monthly amount with little or no commission, such as some mutual fund plans. You probably shouldn't bother with something like a $20 savings bond – while the return will be better than nothing, it will still be discouraging.
Spring is a time of discovery and learning. This is a time to check out companies and learn how to decipher a balance sheet. It is also a good time to start reading about higher-level investing, so that you'll be ready before you enter that phase. Generally speaking, this is when you do some small-time investing as training for the future. You should avoid any investments with high commission costs because your goal is not only to gain experience, but also to get a return on your investment as you learn.
You are starting to move up in the world, and while your disposable income won't put you on the Forbes Most Wealthy list, you do have up to $500 a month to devote to investments if your cell phone bill comes in cheap. This is the time to look at index funds, discount brokerages (to buy individual companies' stocks), income-producing investments and retirement plans. Summer can't last forever, but if you start planning for retirement now, the winter will be much milder.
If you're like most people, summer is a time when you can be very aggressive with your investments, because your disposable income is fairly high compared to your expenses. Furthermore, you may not have a mortgage and a family to worry about at this point, and this means that you can put a larger portion of your investment capital into high-risk, high-return vehicles. If you are keen, you can even look into instruments like options and futures.
This is when you're in your earning prime. However, this season may also be the most expensive time in your life if you are providing financial support to children. In the transition between summer and fall, you may have gained some major debt in the form of a mortgage, but you will be paying it down diligently with your increased earning power rather than spending that money frivolously. Right? After all, winter is coming.
In the fall, you will also be making a series of shifts as far as your investing strategy goes. Hopefully, some of the high-risk investing you did in the summer will pay off now, and you will be able to put that money into more stable investments. Your tolerance for risk isn't what it used to be, but the experience you've gained and the capital you control allow you to profit from lower risk investments. You will be buying bonds as well as continuing your investments into stocks and index funds. If you have prepared well in spring and summer, fall will be the most profitable season as far as investments and income – think of it as bringing in the harvest. This is when you will feel tempted to overspend because of your relative financial security, but try to be cautious, because income branches such as earned wages will soon be bare. (See also What happens during the consolidation phase of an investor's life cycle?)
Your earning days are over and, from your perspective, this winter seems far better than that busy summer long ago. Your bonds and other investments are coming due at important intervals and covering your expenses. When you have extra money, you look at income-producing investments to help you purchase that time-share in Hawaii. If your investments have been especially good to you, you are also looking for a good estate lawyer to help you transfer your unneeded investments to your children and grandchildren, thus sparing your family the burden of estate taxes.
As you sit back in your armchair, basking in the warmth of financial security, you think back to those first steps you took way back in the spring and realize that planning for the seasons of your investing life wasn't so hard to do. In fact, it was almost natural.