Understanding the concept behind lifestyle investing strategy

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Retirement planning has become increasingly relevant over time. The unpredictable nature of life leaves you with little scope for procrastination in money matters. Conventionally, the younger population can invest a significant part of their savings in riskier assets such as equity. But as you grow old, it’s advisable to invest a majority of these savings in safer assets like fixed deposits and government bonds. This approach is based on the concept of lifecycle investing. But does it hold good in today’s skeptical scenario? What are its disadvantages? Let’s find out.

What is lifestyle investing?

Lifestyle investing strategy is based on the assumption that every investor has both kinds of wealth — financial wealth and human capital wealth. While the former is assumed to be held in the form of assets like bank deposits, equity shares, bonds, real estate, insurance, mutual funds, etc., the latter is total value of expected future income from non-investments, i.e., professional work or otherwise. Hence, your total wealth as per lifestyle investing is the sum of financial wealth and human capital.

“The concept of lifestyle investing is relatively new in India but has seen considerable acceptance over a short period of time. This theory actually means to create a passive income from a group of assets which would help an investor pay off over the longer term. Thus, it ensures freedom from job and enjoying retirement early in career. The asset mix could include debt real estate income streams like rent and investment in equities which can offer good dividend income over long sustainable period of time,” said Avinnash Gorakshakar, research director at Profitmart Securities.

What are the drawbacks?

An investment theory, or anything for that matter, is practically useful only if its underlying assumptions remain valid in reality. As in the case of lifestyle investing, the underlying assumptions may not necessarily hold true for everyone onboard. This is because any person’s wellbeing depends not merely on their end-of- period wealth but also on the consumption of goods and leisure during their entire life.

The basic concept of lifestyle investing states that future incomes streams from such assets should finance your living costs. What does it mean? The cash flow generated through one’s investment has to be spent on productive assets which can yield income and returns over the long term.

“The biggest drawback here is that most people do not focus their energy on building assets right from the beginning of their career. They either overspend on unproductive assets or wait too long to start passive assets for a proper life style investing strategy,” Gorakshakar asserted.

Should I adopt this strategy?

All people who want to retire early and want more time for themselves to pursue their passion should follow lifestyle investing. It has the potential to deliver massive returns if riskier assets are prioritised until middle age and conservative allocation is kept for the later years of retirement.

However, this isn’t a strategy that has received unanimous thumbs up from all corners. It has its own longevity risks that investors must weigh before getting tempted by the pros.