A life stage approach is essential for successful investing

One of government’s weapons against slow economic growth is to keep interest rates low. As a result the outlook for post-recession returns on fixed interest investments remains dire. To make matters worse the slowdown in economic activity and a "fair value” local equity market point to pedestrian returns from risk assets in the years to come.

Your clients can tackle this market uncertainty by focusing on their long-term investment goals. A longer-term focus enables them to determine the level of investment risk they can comfortably "carry” in their portfolios at any given time.

If your clients fail to take on sufficient risk inflation will erode the purchasing power of their money over time. The sensible solution is to follow an investment strategy that provides both comfort from a capital preservation perspective and effectively fights inflation. To tackle this challenge you must understand the relationship between investment risk, investment return and time.

The life stage approach to investment has proven itself over time. This approach ensures that your clients’ savings work as hard and for as long as possible, thereby maximising the amount of capital available for providing income during retirement.

During the active working years your client’s main investment objective should be that of wealth creation. This requires an aggressive investment strategy with a greater capital allocation to equities. Given the 30 to 40 year investment time horizon your clients can afford to take on the necessary investment portfolio risk to achieve returns above inflation. Market volatility can be further "tamed” by spreading the portfolio across different asset classes such as property, bonds, cash and international assets.

As your clients near retirement the amount of portfolio risk should reduce to compensate for their inability to suffer capital losses. Although risk reduction pre-retirement makes sense you should avoid being too conservative at this stage, because most retirees have another 20 to 25 years to invest through their retirement.

It is therefore appropriate to follow a smoothed transition process into retirement based on the life stage investment approach. This approach side-steps risks related to both market timing and not taking sufficient risk to protect retirement capital. Protecting this capital from the ravages of inflation ensures that your client can purchase sufficient income in retirement.

A life stage approach to investing will ensure that your clients are clear about what their long term investment objectives are. It will also ensure that they take on the appropriate amount of portfolio risk during each life stage.

This strategy lowers the risk of your clients abandoning their long term investment objectives and provides a clear and consistent path on the route to financial independence at retirement.