Invest for goals but adapt for events
Your financial planning should change as you progress through the different stages of life and this may affect your investment planning, but your financial goals should determine your investment strategy.
Life's major events — your first job, marriage, childbirth, divorce, disability and family deaths — are all key in financial planning. When these events occur, your plans should be reviewed.
This is because your savings plans may be affected and your life and disability cover will probably need to be reviewed, says Bruce Fleming, a financial adviser with Old Mutual Private Wealth Management and the winner of the Financial Planning Institute's financial planner of the year award.
However, you should have savings goals, both short- and long-term ones, and your investment strategy should be dictated by the return you require to meet that goal in the time horizon you have.
If the strategy is one that exposes you to riskier assets such as shares, which will cause big ups and downs in your returns, you should consider your ability to tolerate such volatility given your financial needs and investment time horizon.
Fatima Vawda, MD of investment multimanager 27four, says a good financial adviser should help you manage your required return and risk tolerance and capacity, coaching you on how to view your investment returns so that you can stick to your savings plan when your investment returns disappoint you.
She also cautions against investing too conservatively because you fear investment losses, when your time horizon is long enough to recover from those losses.
Parents saving for a child's tertiary education usually have a decade or more to save.
Life-stage investing is often recommended for retirement fund members — they are automatically defaulted into portfolios with greater exposure to equities and other growth assets when young but move into more conservative portfolios with higher allocations to cash and bonds as they approach retirement.
The aim is to prevent losses on your retirement savings close to retirement, as your investment horizon is short and markets may not recover in time.
Vawda says it typically takes eight years for a multi-asset balanced portfolio to recover from a significant market drawdown.
However, she says the life-staging strategy has some serious flaws as it is designed for groups and does not take into account members' individual circumstances.
With life expectancies increasing, if you are using an investment-linked living annuity for a pension, you will need to plan for an income in retirement for 20 to 25 years, and for this you will need at least a 60% exposure to equities, Vawda says.
In this case, decreasing your exposure to equities before retirement is a costly and fruitless exercise.
Life-staging, however, is worthwhile for members who will purchase a guaranteed annuity that provides a pension for life, Vawda says.
Fleming says no matter what age you are, you need to fill your future earnings "beaker" with life and disability cover when you are young — but as your investments increase, this will reduce the need for this cover. Many people are willing to insure their car or home but pay too little attention to insuring their lives, he says.
• Fleming and Vawda will be part of a panel discussion on investment and life stages at the BDFM Investment Summit on September 14.