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The ETF Book: All You Need to Know About Exchange-Traded Funds, Updated Edition by Richard A. Ferri

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CHAPTER 18

Life Cycle Investing

Life is short and constantly changing. The most appropriate exchange-traded fund (ETF) portfolio for your needs today may not be the one you will need 20 years from now. The life cycle method of investing adjusts your ETF allocation in various asset classes as you move through life’s stages.

The life cycle method is intuitive, because it follows traditional portfolio management wisdom concerning changing risks and returns preferences as we age. The ETF portfolio examples that follow benchmark indexes provided in this chapter are a good starting point for portfolio construction and are designed to be adjusted as needed. The examples are not meant to be one-size-fits-all model portfolios because they do not take into consideration the many nuances of each person’s life and unique financial situation.

Chapter 17 introduced the theory of asset allocation and passive investing. Academic studies have shown that asset allocation accounts for a vast majority of a portfolio’s risks and returns over the long term. For that reason, asset allocation is the single most important decision you will make in portfolio management.

Life cycle investing is a technique that adjusts the asset allocation of a portfolio over various stages in life. Often people are more aggressive investors when they are young because they have little invested and have many working years ahead of them to make up any losses. Investors grow more conservative as they enter middle age and ...

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