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Markets in a Minute

Identifying Your Stage on the Investor Lifecycle

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This Markets in a Minute Chart is available as a poster.

Investor Lifecycle Diagram

This Markets in a Minute Chart is available as a poster.

Identifying Your Stage on the Investor Lifecycle

As people age and progress through their careers, their financial goals continuously evolve. Understanding one’s current goals, while also planning for those in the future, are two important elements of financial planning.

In this Markets in a Minute chart from New York Life Investments, we outline the investor lifecycle, a three-staged theory designed to help individuals optimize their portfolios as they age.

The Three Stages

Each lifecycle stage is associated with a set of distinct objectives that, when incorporated into a long-term investment plan, will guide the investor through to retirement.

Lifecycle StageCommon Short-term ObjectivesCommon Long-term Objectives 
Accumulation Stage (Ages 20-35)- Paying off student debt
- Buying real estate
- Building emergency savings
- Saving for children's education
- Accumulating wealth
Preparation Stage (Ages 35-60)- Taking vacations
- Funding children's education
- Planning for retirement
Retirement Stage (Ages 60+)- Achieving desired lifestyle
- Covering medical expenses
- Estate planning

These age-sensitive objectives will ultimately shape an investor’s risk profile and portfolio allocations.

The Accumulation Stage

Individuals in the accumulation stage are just beginning their careers, meaning they have a relatively low net worth and a long time horizon until retirement.

With over 30+ working years ahead of them, it’s often an ideal time for these investors to build more aggressive portfolios geared towards capital gains. In practice, this usually results in a significant allocation to equities.

This is because equities boast a relatively higher return potential, making them suitable for younger investors looking to accumulate wealth. Their long time horizons also allow them to ride out periods of short-term volatility that equity markets sometimes experience.

The Preparation Stage

Individuals in the preparation stage will likely reach their peak earning years, and as a result, will have a greater capacity to save and invest.

Getting the most out of this capacity will require these investors to establish a long-term financial plan centered around retirement. Because they now face a shorter time horizon, they may want to consider a more balanced risk profile.

While equities may still play a major role in these individuals’ portfolios, the asset class’s overall allocation is often dialed back in favor of safer securities such as investment-grade bonds.

The Retirement Stage

As individuals begin to retire, their risk profiles typically become more conservative. Capital preservation and steady income are the top priorities, and in most cases, portfolios become predominantly weighted towards fixed income and money market securities.

Retirees may want to retain an allocation to equities, however. The possibility of outliving one’s savings, also known as longevity risk, is a real possibility—especially given the higher medical costs associated with old age:

Age GroupAverage Annual Healthcare Spending ($)
0-18$3,749
19-44$4,856
45-64$10,212
65-84$16,977
85+$32,903

Source: Peter G. Peterson Foundation

According to the data, the average American experiences a sharp increase in medical costs once past the age of 45. This could spell the need for returns higher than what is provided by a fixed income-only portfolio. Maintaining exposure to equities—an asset class that has historically generated higher returns than fixed income—could help to mitigate longevity risk.

Putting It All Together

According to the investor lifecycle, a typical portfolio will transition through three broad stages over one’s lifetime. At each consecutive stage, the types of assets used should be adjusted to reflect the investor’s shifting risk profile.

By the final retirement stage, the appetite for risk is often low, and the core of a portfolio will be typically comprised of high quality, income-oriented investments. Careful monitoring of income and expenditures will also be required to reduce longevity risk.

While unique circumstances can sometimes warrant a deviation from the three stage lifecycle, its underlying theme still holds true—an investment portfolio should always be optimized to support one’s goals.

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Markets in a Minute

What is the Success Rate of Actively Managed Funds?

For actively managed funds, the odds of beating the market over the long run are like finding a needle in a haystack.

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Actively Managed Funds

What is the Success Rate of Actively Managed Funds?

Over a 20-year period, 95% of large-cap actively managed funds have underperformed their benchmark.

The above graphic shows the performance of actively managed funds across a range of fund types, using data from S&P Global via Charlie Bilello.

Missing the Mark: Actively Managed Funds

Several factors present headwinds to actively managed funds.

  • Trading costs: First, fund managers will trade more often than passive funds. These in turn incur costs, impacting returns.
  • Cash holdings: Additionally, many of these funds hold a cash allocation of about 5% or more to capture market opportunities. Unlike active funds, their passive counterparts are often fully invested. Cash holdings can have the opposite effect than intended—dragging on overall returns.
  • Fees: Active funds can charge up to 1-2% in investment manager fees while funds that tracked an index passively charged just 0.12% on average in 2022. These additional costs add up over time.

Below, we show how active funds increasingly underperform against their benchmark over each time period.

Fund Type1 Year
% Underperformed
5 Year
% Underperformed
10 Year
% Underperformed
20 Year
% Underperformed
All Large-Cap 51879195
All Small-Cap 57718994
Large-Cap Growth 74869698
Large-Cap Value 59698587
Small-Cap Growth 80598597
Small-Cap Value 41819192
Real Estate 88627487

As we can see, 51% of all large-cap active mutual funds underperformed in a one-year period. That compares to 41% of small-cap value funds, which had the best chance of outperforming the benchmark annually. Also, an eye-opening 88% of real estate funds underperformed.

For context, Warren Buffett’s firm Berkshire Hathaway has beat the S&P 500 two-thirds of the time. Even the world’s top stock pickers have a hard time beating the market’s returns.

2020 Market Crash: A Case Study

How about active funds’ performance during a crisis?

While the case for actively managed funds is often stronger during a market downturn, a 2020 study shows how they continued to underperform the index.

Overall, 74% of over 3,600 active funds with $4.9 trillion in assets did worse than the S&P 500 during the 2020 market plunge.

Stage of 2020 CycleTime Period% Underperforming S&P 500
CrisisFeb 20 - Apr 30, 202074.2
CrashFeb 20 - Mar 23, 202063.5
RecoveryMar 24 - Apr 30, 202055.8
Pre-CrisisOct 1 2019 - Jan 31, 202067.1

Source: NBER

In better news, roughly half underperformed through the recovery, the best out of any market condition that was studied.

The Bigger Impact

Of course, some actively managed funds outperform.

Still, choosing the top funds year after year can be challenging. Also note that active fund managers typically only run a portfolio for four and a half years on average before someone new takes over, making it difficult to stick with a star manager for very long.

As lower returns accumulate over time, the impact of investing in active mutual funds can be striking. If an investor had a $100,000 portfolio and paid 2% in costs every year for 25 years, they would lose about $170,000 to fees if it earned 6% annually.

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Markets in a Minute

Ranked: The Largest Bond Markets in the World

The global bond market stands at $133 trillion in value. Here are the major players in bond markets worldwide.

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The Largest Bond Markets in the World

The Largest Bond Markets in the World

In 2022, the global bond market totaled $133 trillion.

As one of the world’s largest capital markets, debt securities have grown sevenfold over the last 40 years. Fueling this growth are government and corporate debt sales across major economies and emerging markets. Over the last three years, China’s bond market has grown 13% annually.

Based on estimates from the Bank for International Statements, this graphic shows the largest bond markets in the world.

ℹ️ Total debt numbers here include both domestic and international debt securities in each particular country or region. BIS notes that international debt securities are issued outside the local market of the country where the borrower resides and cover eurobonds as well as foreign bonds, but exclude negotiable loans.

Ranked: The World’s Top Bond Markets

Valued at over $51 trillion, the U.S. has the largest bond market globally.

Government bonds made up the majority of its debt market, with over $26 trillion in securities outstanding. In 2022, the Federal government paid $534 billion in interest on this debt.

China is second, at 16% of the global total. Local commercial banks hold the greatest share of its outstanding bonds, while foreign ownership remains fairly low. Foreign interest in China’s bonds slowed in 2022 amid geopolitical tensions in Ukraine and lower yields.

Bond Market RankCountry / RegionTotal Debt OutstandingShare of Total Bond Market
1🇺🇸 U.S.$51.3T39%
2🇨🇳 China$20.9T16%
3🇯🇵 Japan$11.0T8%
4🇫🇷 France$4.4T3%
5🇬🇧 United Kingdom$4.3T3%
6🇨🇦 Canada$4.0T3%
7🇩🇪 Germany$3.7T3%
8🇮🇹 Italy$2.9T2%
9🇰🇾 Cayman Islands*$2.7T2%
10🇧🇷 Brazil*$2.4T2%
11🇰🇷 South Korea*$2.2T2%
12🇦🇺 Australia$2.2T2%
13🇳🇱 Netherlands$1.9T1%
14🇪🇸 Spain$1.9T1%
15🇮🇳 India*$1.3T1%
16🇮🇪 Ireland$1.0T1%
17🇲🇽 Mexico*$1.0T1%
18🇱🇺 Luxembourg$0.9T1%
19🇧🇪 Belgium$0.7T>1%
20🇷🇺 Russia*$0.7T>1%

*Represent countries where total debt securities were not reported by national authorities. These figures are the sum of domestic debt securities reported by national authorities and/or international debt securities compiled by BIS.
Data as of Q3 2022.

As the above table shows, Japan has the third biggest debt market. Japan’s central bank owns a massive share of its government bonds. Central bank ownership hit a record 50% as it tweaked its yield curve control policy that was introduced in 2016. The policy was designed to help boost inflation and prevent interest rates from falling. As inflation began to rise in 2022 and bond investors began selling, it had to increase its yield to spur demand and liquidity. The adjustment sent shockwaves through financial markets.

In Europe, France is home to the largest bond market at $4.4 trillion in total debt, surpassing the United Kingdom by roughly $150 billion.

Banks: A Major Buyer in Bond Markets

Like central banks around the world, commercial banks are key players in bond markets.

In fact, commercial banks are among the top three buyers of U.S. government debt. This is because commercial banks will reinvest client deposits into interest-bearing securities. These often include U.S. Treasuries, which are highly liquid and one of the safest assets globally.

As we can see in the chart below, the banking sector often surpasses an economy’s total GDP.

Banking Sector

As interest rates have risen sharply since 2022, the price of bonds has been pushed down, given their inverse relationship. This has raised questions about what type of bonds banks hold.

In the U.S., commercial banks hold $4.2 trillion in Treasury bonds and other government securities. For large U.S. banks, these holdings account for almost 24% of assets on average. They make up an average 15% of assets for small banks in 2023. Since mid-2022, small banks have reduced their bond holdings due to interest rate increases.

As higher rates reverberate across the banking system and wider economy, it may expose further strains on global bond markets which have expanded rapidly in an era of dovish monetary policy and ultra-low interest rates.

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