Life Cycle Investing: The Art of Investing
Abstract
Is money simply a medium of exchange or does it represent the goal of every individual in the world. It is often thought that this monetary goal will result in freedom, but what
does the word freedom actually mean? Freedom to make choices, freedom to pursue our own unique forms of happiness, freedom to choose a lifestyle which creates a piece of mind with ones surroundings. This whole concept of freedom is somewhat of a
contradiction, however. Like anything else in our world that has a price, freedom is no exception. Does money buy freedom or does money act as a watchdog over
everyday activities? Your actions today will determine your financial security of tomorrow. By disciplining yourself today and determining your investment strategies, regarding the amount of risk you want to take on, you enable yourself to create the lifestyle
you desire without giving up as much of your highly coveted freedom.
The return on your assets will provide you with a freedom to enjoy life and the material things investments can produce. This freedom, however, comes with an underlying discipline that must be adhered to in order to provide funds for investing. This paper will
suggest portfolios to encompass these funds for the different stages of the investors life. There are a number of theories that suggest that returns on investments can by calculated by equations. The truth of the matter, and the premise of my paper, is that investing is not a science, but
rather an art. The human factor, that must be injected into the
investment returns, is a variable that cannot be quantified. As long
as the humans continue to act irrationally and out of their own free
will, investment analysis will remain an art and not a scie_nce.
The one human factor which is inevitable are the stages of life
that an individual experiences over a lifetime. This process, along
with the investment decisions that accompany it, is the main focus
of this paper. The life cycle analogy is one that provides an
investment decision framework for every individual at differing
stages in life.
The war on the difficult task of investing must be waged on
many different fronts. The Efficient Market Theory and the Random
Walk Theory will be discussed in order to provide a spectrum of the
relationship between the work of analysts and brokers and their
returns. lnvestor's tolerance of different forms of risk is also a
topic that will be explored in part one. Part One deals with this
aspect along with the risk-return relationship.
Part two of section one gives information on the different
tools of investing. These tools are then utilized to develop the
different elements that make up a portfolio. This information is
then used to offer different views about the diversification process.
With the foundation being laid from the previous two parts of
section one, the topic of life cycle investing can be addressed.
First, a general theory on life cycle investing is introduced along
with reasoning for this type of approach. Next, the different stages
of investment are presented accompanied by suggested portfolio
allocations. Finally, inflation and investments that help hedge
against it are brought into the portfolio mixture. This last section
is accompanied by an easy-to-use indicator which helps provide a
tool for the investor in determining market timing.
Section two describes my internship at Gorian-Thornes
Investments. This section outlines the readings that influenced my
paper and some of the contents of them. It also provides
information on the tasks completed, meetings attended, and how .1
used the computer system during my stay at GTI. Accompanying
these duties are exhibits that are used to illustrate the work
performed. The last part of section two consists of a professional
journal. This journal shows my experiences at GTI and my reactions
to them.
Section three reflects upon my internship and how previous
coursework has aided me during the process. My career outlook is
then provided, taking into consideration my experience at Gorian
Thornes Investments.
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