Remember James & Robert? Both are at the prime of their lifetime with some cash at hand. Let's follow the investment decisions they take throughout their lives.
James is a young logistics manager. He has a degree in civil engineering and followed an MBA to complete his education, giving him some financial background. James loves adventure and discovering and learning new stuff. James is driven by a desire for knowledge, and he wants to take his financial adventure into his own hands.
Robert is a young art director. He studied art at college. His passions include going to concerts and visiting museums. He has no financial background whatsoever. Robert is quite conventional and likes to stick to what he knows.
James is young and wants to learn more about the financial markets. He has learned during his MBA that quite some financial experts agree upon the fact that if one should be willing to take risk, he should do it early on in his life. That is why James opens a portfolio, which he will manage entirely himself, for 40% of his wealth. To do so, he subscribes to an Excel course in order to run financial models and learns how to code VBA and he reads himself into all the knowledge available on financial markets. Since he is young, and has quite some risk appetite, he decides to compose his portfolio fully of stocks, which he optimises according to the Modern Portfolio Theory.
Wanting some kind of financial back-up but while still benefiting from the financial markets, in case his actively managed portfolio doesn't turn out to be how he expects, James parks 20% of his wealth into mutual funds. He knows what he is talking about, and selects the funds himself, resulting in a combination of aggressive funds, consisting of 80% stocks and 20% bonds. Additionally, a part of his salary will go to this mutual fund on a Dollar Cost Averaging basis.
Having invested 60% of his wealth in stock- and bond markets (with variable returns), he thinks it is wise to invest some money in more secure assets. He chooses to invest 20% into long-term deposits with a fixed return and with capital protection. Meaning that those 20% he is certain to get back, plus a secured amount of interest.
After all, he wants some super secured investment that might serve him as retirement income later. He invests 10% in a well-established pension fund with almost no risk.
With his last 10% he decides to play around a little bit on the cryptocurrencies' markets for 5%, while keeping a last 5% of cash at hand in his savings account in case he would need to cover some unexpected expenses very quickly.
Robert is young and wants to enjoy life. He has no interest at all in financial markets and prefers to go with existing, traditional tools. His focus is on his career as an art director.
Liking security and comfort, Robert decides to invest 60% of his wealth (excluding mortgage) into real estate straight away, by buying an appartement he really likes. Real estate after all, has been known as a quite steady and safe market to invest in. Additionally, Robert will have the benefit of living in his own appartement, which would exclude the necessity of paying rent.
Being informed by his advisor at the bank, he decides to trust 10% of his wealth into mutual funds that are managed by a major fund manager. Being a bit risk-averse, he decides to invest in a moderate defensive fund, consisting of 50% of stocks, and 50% of bonds.
In order to prepare for his retirement, his decides to invest 10% into a well-established pension fund, with almost no risk.
The remaining 20% of his wealth he decides to split up between 10% of long-term deposits, offering some return, and 10% in savings accounts in case he needs to cover some unexpected expenses quickly.
And they grew older...
An investment strategy is entirely personal and depends on many factors: Your income, the market's performance, fiscal advantages, and many more. Finding a way through the jungle of possibilities is not an easy task, especially if you are not financially literate. Nonetheless, a large variety of tools and opportunities exist for people without much knowledge about finance and investments also.
The above strategies are not definite, and definitely not static. Those are evolving processes and merely an illustration of what things look like if you just give a thought to your decisions.
During his forty years of career, James has acquired quite some wealth. In the meantime, he has acquired a house in the outskirts of his birth city.
Reaching his retirement age, he still has an appetite in finance and investments and feels comfortable enough in managing his own portfolio, albeit to a lesser extent in relation to his total wealth (30%). Additionally, not willing to take as much risk as he used to when he was younger, his portfolio consists now of 80% bonds and 20% stocks.
Being so busy with his actively managed portfolio, he lost interest in managing the mutual funds and he decided to transfer his part in mutual funds towards safer pension funds. Since he is reaching retirement age, James has also some long-term deposits that will come to an and soon and that will be transferred to his savings account.
During his forty years of career, Robert has acquired quite some wealth. His investments have paid off.
Being happy by the performances that were achieved by his mutual funds, so during his career decided to add funds on a cost averaging basis. Nonetheless, Robert likes safety and stability and made sure that his stake in pension funds were at least as significant than in the mutual funds.