For decades, the conventional wisdom held that investors should contribute regularly to retirement savings over time, benefiting from compound interest. But what if that strategy is wrong? Ed Rempel, a Certified Financial Planner and tax accountant, says that young investors can build the most wealth this way by taking a Lifecycle Investing approach.
“Lifecycle Investing is spreading your investment risk over your entire working life. Rather than saving small amounts for several decades and picking up the bulk of your wealth in the decade before your retirement, this approach allows you to invest more money when you are younger and let the markets grow over the decades,” says Rempel.
Most individuals will make small contributions to their RRSPs or TFSAs in anticipation of slow but steady growth. However, this approach leaves them vulnerable to “Last Decade Risk.” This is particularly vulnerable to market downturns, Rempel says, when the majority of an investor’s portfolio builds up in the last 10 or 15 years before retirement.
“If the stock market has a crash in those last few years, all of your retirement savings could be seriously impacted. That’s why Lifecycle Investing is about diversifying across time, not just assets,” Rempel explains.
The logic behind this approach is easy enough: young investors borrow to invest more heavily when they are in their 20s and 30s. As they get older, they will gradually reduce leverage but continue to benefit from the long-term compounding of their earlier investments.
History backs up Rempel: He cites 150 years of data evidence that this approach has dramatically beaten conventional investing. “Research has demonstrated that the approach of Lifecycle Investing can boost retirement wealth by an average of 63%,” he writes. “By getting started sooner and with more capital, investors put themselves in a far better position to achieve financial independence.”
A central tenet of Lifecycle Investing is that it matches an investor’s stock market exposure with their entire working life, not just the years that they actively contribute. That means capitalizing on the growth potential of the market over the long term well ahead of traditional dollar cost-averaging strategies.
The sooner you invest, the more time you give your money to grow—and that’s the true secret to accumulating wealth long-term. The longer your investments can compound, the better for your finances.
Although Lifecycle Investing provides a helpful outcome, it isn’t a one-size-fits-all strategy. Borrowing to invest involves risks, and it takes discipline to manage debt and stick with a long-term play.
The experts say you need a plan to use leveraged investments. Without a plan (and mental fortitude) to ride out short-term downturns, some investors could end up in financial trouble if they aren’t ready. Before investing in a leveraged product, it is important to have a solid financial foundation first.
Meanwhile, financial experts recommend that borrowers employing this strategy should have a well-diversified portfolio and steer clear of high-interest debt. With proper risk management, liquidity management, and other contingency plans, Lifecycle Investing can be implemented as a longer-term strategy.
Lifecycle Investing provides a new process for younger investors to optimize their financial future, allowing them to avoid time-honoured savings plans. By front-loading investments and adding diversity on a time basis, it also offers a potential road to better financial security. When using any financial strategy, however, it is wise for individuals to seek professional advice and determine whether it makes sense for their goals and risk tolerance.
“Lifecycle Investing could be a key to unlocking your wealth potential, especially if you’re under 40 and serious about achieving financial freedom. It’s about playing the long game—but playing it smart,” Rempel concludes.
It is worth noting that Lifecycle Investing is not necessarily appropriate for all investors, but it could potentially offer a compelling opportunity for those with long-term investment horizons who are open to taking uncompromised risks to drive superior financial returns.
