Life Cycle Theory of Investing

Discussion of lifecycle investing theory may seem a bit academic for a wealth management practice website, but we felt a brief discussion of the main points may be helpful. Much of this material is sourced from Professor Zvi Bodies article, “Thoughts on the Future: Life-Cycle Investing in Theory and Practice.” Financial Analysts Journal, vol. 59, no. 1.
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The challenges facing us today in planning for lifetime financial security is very different from previous generations. One might think that new challenges would lead to new solutions. Yet, the wealth management industry today is often still working to an outdated theoretical model, and not surprisingly, it is proposing outdated strategies and solutions.

Clients come to us knowing that aside from what they create for themselves, there are few, if any, reliable financial safety nets available to them in old age. The defined benefit pension plan is virtually dead.  State pension plans are  acknowledged to be insolvent.

In the real world, insolvency means “no can pay”. What the state will eventually do about this is an open question. States have reached the point where they are saying, "Yes, we have a problem". They are still working towards "This is what we will do about it". 

Furthermore, people are living longer and health care costs are increasing. Family support is not as available as in prior generations, and there are some very unrealistic expectations about appropriate savings rates and expected investment returns. As we have seen in the market turmoil recently. The Swiss market index returned -11% from 1998 to 2008.

To these challenges, the Wealth Management industry by and large responds with the old paradigm view outlined in the table below.  
We feel strongly that the new paradigm is far more appropriate to the challenges and issues facing us today and we try to incorporate that into our planning and advice.  

Old vs. New Paradigm of Wealth Management

Bodie, Zvi. 2003. “Thoughts on the Future: Life-Cycle Investing in Theory and Practice.” Financial Analysts Journal, vol. 59, no. 1 (January/February):24–29