Investment Live Cycle

In a cooperation with Business Insider Magazine “Learning from the super-rich”, BeeWyzer is contributing articles and webinars since January 2025 in order to contribute lessons from managing big wealth to a broader public. In the end, an increase in wealth and investable assets is a driver of economic growth and beneficial for everybody. We are happy to share the articles in our blog also – feel free to skip if you are an expert already and enjoy the read if they offer valuable knowledge to you!

Investment life cycle – which asset classes should you pick at what age?

 By Barbara Stadermann and Peter Brock, BeeWyzer GmbH, The title of this article seems to suggest a simple answer:

Buy a lot of stocks, when you are young and reduce the allocation with age.

But is it really that simple? Well, once again, things are not that easy, so let's have a look

The idea of stock quotas as a risk measure originates from the basic portfolio models used in the financial industry. In our articles and presentations, we regularly point out that this can be misleading: A stock portfolio with an attractive dividend yield hedged for 90% of the exposure clearly represents low risk, while a bond portfolio with long maturities or poor credit ratings represents high risk.

Think about it: an interest rate increase of half a percent can easily cause a book loss of up to five percent for a 10-year-bond, ceteris paribus. Considering the yield on a German government bond, this is quite a blow. So why do we have this thinking in stock quotas at all? Because it is useful for the practical work of client advisors and supervisory bodies, risk explained this way is easily understood by customers, and the documentation is mechanic and easy to grasp.

But there is another reason, why this approach is misleading, when assessing risk: stock market risk is not only embedded in stocks, but also in corporate bonds, convertible bonds, equity bonds, private equity, some hedge fund strategies and other investment segments. It would therefore be wise to measure stock risk across the entire wealth portfolio, but this is rarely done by or for private investors. Such a holistic view should be reflected in what is known as the strategic asset allocation (SAA). However, SAA is often limited to liquid assets, and only trained financial planners regularly take a comprehensive view. 

And, besides the misunderstanding of stocks representing RISK and bonds representing SAFETY, there is another inconsistency in the classical investment philosophy: diversification.

Spreading investments across many asset classes is supposed to reduce risk more than it reduces the potential return. But does that really work? Even Harry Markowitz, the brain that started portfolio theory and the principle of diversification, demonstrably did not stick to this concept in his own portfolio. And one of Warren Buffett's many pieces of wisdom is that wealth is created with the concentration of risk, but preserved with the diversification of risk.

So, how can private investors build wealth if broad diversification is the name of the game? We would like to share a few thoughts that can help tackle the contradiction:

• Yes, when you are young, you can and should take more risk. However, you should not limit your focus to stocks. It is illiquid and entrepreneurial investments, such as private equity, that can generate excess returns – even in collective investment vehicles with some diversification. Good managers, long maturities and the ‘illiquidity premium’ should do the job for you.

One might object that young people face many economic uncertainties, such as having a child or buying a house. But does that mean you should invest in liquid assets alone?

Two thoughts on this: very few people make money with flat or house they buy for themselves on the long run. And in Germany living on rent and living on property costs about the same when compared like-for-like – due to tax implications. Here are some ideas:

• It may be better to buy property and rent it out, while you are living in a rented place
• When you invest in stocks in order to build wealth, you should have a long time-horizon anyway, so you can, place your funds in private equity and alternatives instead.
• It may be better after tax to buy property and rent it out, while you are living in a rented place.
• But: taxes issues should not be your investment advisor, a bad investment will be a bad investment after tax, also.
• Keep liquidity for adversities of life, but go all in with the rest of your funds: If you want to build wealth, because you have little, too much risk aversion and too much diversification will not get you anywhere.
• Play alternative assets right from the start, get financial education or find good advisors to implement your strategy.

Besides, it was again Warren Buffett, who stated, that investment in your personal education offers the highest potential return.