When we talk about the life cycle of investments, we are referring to the different moments in the life of a product, of the investment itself, of a company or of the physical person, in which the financial needs are different. That is to say, it refers to the fact that investments are not something uniform, but evolve and vary according to the time of the product, company or person.
- Next, we will look at three applied life cycle cases.
- An example of a life cycle associated with a person.
- It is described in general terms, it is clear that each case has to be treated in a specific way but many people follow the pattern explained below.
- Until the age of 30 the investment needs are few. Therefore, savings or debt needs are low.
- From the age of 30 onwards, many people want, among other things, to acquire a habitual residence (until now most of them live mainly for rent) or to form a family and have children. Investment needs change and become greater. This implies the need to save in order to, for example, pay a deposit for the new flat and/or get into debt with a financial institution. In this period with important investments, it is vital that the person has healthy finances and maintains a constant or ascending line of income.
- In the 40s or 50s, needs change. There are no investments in material assets, but there are needs for investments in intangibles such as outlays for children’s higher education.
- In the years leading up to retirement, the investment needs change and the main thing is saving, which is usually used for retirement plans, savings insurance or similar. This is done in anticipation of a decrease in income after the age of 60 or 65.
- An example of an investment life cycle.
If we are talking about a life cycle of an investment, we will refer to phases such as those that follow:
- Detection of the need or initial approach phase. At a certain point in time, in the company, we detect that it is necessary to make an investment because one of our machines, for example, is becoming obsolete. We value replacing it with a more modern one that manufactures more units in less time and with less electricity, for example.
- Valuation of investment options. To solve the problem of having to manufacture more and save energy, we have to see what the possibilities are. We may be able to buy machine A or machine B. Each one has a different cost but also means a different extra production.
- Decision making on the most efficient investment. At this point, with respect to the previous options, a VAN / TIR analysis is usually carried out, from which you will be able to learn more in the Deusto finance course.
- Execution phase. In this phase, the company has decided which machine to opt for and has carried out the operation, acquiring it either with its own funds or by going into debt.
- Evaluation phase. After some time of operation, it is essential to evaluate whether the machine has brought about the improvements in production and the savings in operating costs that we commented on in point 2.
- A final example of life cycle that we wanted to present is the product life cycle.
Although this is not an investment lifecycle case, we do believe that it illustrates the lifecycle concept very well. This life cycle is the set of stages that a product goes through.
It is a stage of risk and uncertainty. Although we have carried out a market study, we do not know how it will react. In this phase, we are very alert as to whether the product needs to be retouched and/or its commercial strategy needs to be reoriented.
The product already has a clear idea of what type of target audience it is aimed at and is accepted by the potential market. Sales are growing and it is necessary to make sure that production satisfies these growing sales.
The product has already reached its peak of growth. The key here is to consolidate the sales volume and that means that the product does not lose attractiveness. It is often necessary to establish innovation strategies, search for alternative markets, etc.
In the last stage of a product’s life cycle, sales begin to decline. The market consumes more innovative and competitive alternative products. If this stage arrives, the company has to minimize the investment in this line and withdraw the product from that market. If it is an organization with a good commercial strategy, it will have launched other novelties to the market.
Now that you have more information, we encourage you to study your personal investment life cycle. Courage!