An investor's finances, goals and risk-taking capacity change with time. These changes must be taken into consideration in reviewing one's investment portfolio from time to time.
For the average investor, without taking into account the life cycle approach, the risk/return relationship would be depicted. Investors must take into account five key elements in constructing a life cycle portfolio:
•Stability of principal,
•Current income,
•Capital growth,
•Aggressive income, and
•Growth and lump sum investments.
•Investors achieve principal stability by searching out investments that provide optimum protection against market loss and value fluctuations.
•While the investment will earn some return, the paramount consideration is to guard against loss of the principal amount.
•Current income generating investments such as dividend from common and preferred stocks, bonds, certificates of deposit, and savings accounts take on more importance as investor’s progress through the life cycle phases.
Capital growth investments seek long-term capital appreciation to build the desired level of wealth. Ideal growth oriented investments include common stocks, mutual funds and bonds as well as hard assets such as real estate and precious metals. These can be utilized during any phase of the life cycle.
Source : Rediff business
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