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Let's face it – we're getting older. Admit it or not, most of us are not as adept at taking risks as we were, and when we fail it's harder to recover.

That life lesson applies to investing, too. In youth we're willing to throw caution to the wind in the hope of getting rich. As we age, our priorities shift to holding on to what we have.

Vancouver-based KCM Wealth Management president Adrian Mastracci has guided investors through the stages of life in his four decades advising clients.

"The first 30 years you concentrate on developing and accumulating human capital," he says. "The next 30 years you concentrate on investing, the family and capital accumulation. The last 30 years hopefully you're spending and enjoying what you've accumulated, and maybe even arranging a succession."

The hardest life change for most investors is shifting their mindset from capital accumulation to capital preservation, Mr. Mastracci says. He helps them with risk-management strategies that use the right selection of holdings and the right mix of stocks and bonds – known as asset allocation.

"Most people don't understand risk management. They don't have a game plan. That's their biggest problem," he says.

To help explain he uses a model that assumes a life span of 90 years. He divides investors into categories, with the main three being growth, balanced and income.

Growth

The period between the present and when an investor needs to cash out and use the money is called the time horizon. Growth investing is best suited to younger people with long time horizons – they have plenty of time for investments to grow, or plenty of time to recover if investments lose value over the short term.

For growth investors, who could be as old as 70, the reward for taking on more risk is annual returns averaging between 6 per cent and 9 per cent.

The asset allocation at this stage is typically 60 per cent stocks and 40 per cent bonds. More aggressive investors can hold up to 80 per cent in stocks and make returns of between 10 and 15 per cent, but Mr. Mastracci suggests ratcheting down the risk when an investor turns 50.

The sky is the limit for speculative investors fully invested in stocks, but he feels they should start playing it safe at 40.

Balanced

A typical balanced portfolio is split evenly between stocks (including mutual funds or exchange traded funds) and fixed income – which could include government bonds, corporate bonds, guaranteed investment certificates or any cash or money market product.

Risk can also be adjusted within each side of the portfolio to suit the individual investor.

According to the model a balanced investor is usually between the ages of 40 and 80, and typical returns fall in the range of 5 per cent to 7 per cent.

Income

Once investors reach 60, income becomes a priority. Fixed-income investments should overtake stocks – typically in a 60/40 split. Annual returns would average between 4 per cent and 6 per cent, according to the model.

Investors in their twilight years might further shift to capital preservation over capital growth and reduce equity holdings to 20 per cent.

The model has many overlaps, but in the end Mr. Mastracci says it's up to the individual, and the rules are not hard and fast.

"It's usually a slow process. If there's a reason to change, we change. If there's not a reason to change, we leave it alone," he says. "If you need to go from one to the other, maybe take two or three or four years. Take it slowly."

From saving to spending

While the shift from wealth accumulation to wealth preservation can be phased in over time, the change from saving to spending is more dramatic. After a lifetime of socking away money, new retirees must shift their mindset to withdrawal mode while still generating returns from what remains in their portfolios.

The process starts with careful budgeting, and separating personal needs from wants, says Peter Drake, vice-president of retirement and economic research for Fidelity Investments. Needs are generally defined as food, clothing and shelter but with unknowns such as life expectancy, inflation and health care costs, he says it's never that simple.

"There are a lot of expenses that only the individual can decide how essential or how discretionary they are," Mr. Drake says.

A portfolio should reflect that split between essential and discretionary expenditures. A reliable income stream that includes Canada Pension Plan and Old Age Security benefits should cover the needs, and a diversified portfolio of equities should cover the wants.

"If the equity market goes down, you can hold off on your discretionary expenditures until it comes back up. If you're relying very heavily on equities for your essential expenses you face the risk of having to get out of some of those equities at the wrong time," he says.

In the past, personal financial needs were backed by bonds, but with rock-bottom bond yields, Mr. Drake says some equities are necessary to grow savings above inflation.

"Stocks that pay a regular dividend, companies that have a history of increasing their dividends – this is something people in retirement might look more closely at than young people who have a long way to go toward retirement."

Mr. Drake says retirees should run through market scenarios regularly with a professional to ensure the mix is right as circumstances change in the world and at home.

"This is not a set-and-forget situation. You need to take responsibility on an ongoing basis – with your adviser – at least once a year."

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