Question

Think about the financial circumstances of your closest relative from your parents’ generation, or of a friend or acquaintance 25 to 30 years older than you. Now, consider the financial situation of your closest friend or relative who is in his or her 30s. Write down the objectives and constraints that would fit each investor's investment decisions. How much of the difference between the two documents is due to the age of the investors?

Answer 1

Objectives and constraints of a person in their 50's or 60's :-

People in this age range are on the verge of their retirement or have already retired. This means that they realise that their regular stream of income is about to end. People tend to make provisions for a comfortable retirement or people who have already retired want to keep their lifestyle sustained. In this phase, objective of the people is to reduce the dominance of the risky equity from their portfolio and increase it in cash or debt securities. People who have retired are the least risk tolerant and hence should keep investment in equities to the minimum. The major constraint in this kind of phase is that since their earning have dried up, they will not be able to increase their investment. Also, they will not look to invest in instruments with larger frame of maturity . They will like to keep their investment as liquid as possible.

Objectives and constraints of a person in their 30's :-

The financial objectives of this group of people is more inclined towards making big decisions pertaining towards marriage, house, car,etc. The people who fall in this age bracket mostly have a stable job and have a certain work experience as well. This helps to provide a steady stream of income which also is on a upward trend. This allows them to take a more aggressive approach. Such people tend to invest more in the risky equities as their return are also higher. Their investment portfolio consists less of debt. However, they also face a few constraints. Since most of them start earning, their expenses shoot up drastically leaving behind little or no savings. This affects their ability to invest money. Also the added responsibility of family expenditure makes them less incentivised towards savings.

Age of the investors play a major role in deciding the kind of investment pattern a person follows. The risk taking ability of an individual is decided by his age. The added responsibilities that come with age makes a person less risk tolerant. When you at the start of your career, you are able to take higher risks to garner more returns, while on nearing retirement the dependence on risk diminishes. This is a pivotal transition that must be planned and followed with care to achieve a secure financial future.