In building an investment plan over time, an important place to start is to look at the characteristics of the investments on offer.

Investments are generally characterised into two categories, defensive assets and growth assets. Defensive assets are those assets that have very little volatility (fluctuations in value and returns). These assets also have the lowest expected return compared to growth assets. So why use them at all in portfolios if they have a lower expected return? The answer is reliability - because there is less volatility there is almost no risk of a sharp drop in value of these assets .

Growth assets have greater volatility, with periods of negative returns - potentially even 5 year periods of negative returns. However over the long run they have a higher expected return - around 4 per cent - 6 per cent more than the rate of return on a cash account. Some key growth assets include shares, listed property trusts, global shares and direct residential property. Shares are where you become part owner of a company or portfolio of companies. Listed property trusts are like shares, except rather than becoming a part owner of a company you become part owner of property assets. Global shares are shares listed on overseas share markets and direct residential property is buying an investment property.

Early stages - Age 20 to 35

Superannuation is the biggest investment people in this age group are likely to ever have because they will be receiving the compulsory 9% Government Contributions over the whole of their working life. People in this age group are at least 25 years away from touching their superannuation, so it makes sense to have almost all of this invested in higher expected return growth assets - like shares, property and global shares.

An initial priority at this time, and all through life, is to build up a cash reserve that can be quickly accessed in case of an emergency or unexpected event. The amount of this will vary from situation to situation; however having $5,000 to $10,000 in cash will help a lot if there is a sudden health problem or loss of a job.

If there is surplus income for long term wealth creation, then growth assets make sense because investors in these times have the longest time period until full retirement and can manage the volatility in exchange for the higher expected return from growth assets.

A managed investment, like a managed fund or index fund, makes a great deal of sense for people starting out as they can put together a small but effective regular investment plan, say $200 a month, straight into growth assets.

Diversification amongst growth assets is important. They all have similar expected returns, so having exposure to all of them helps 'smooth out' the ups and downs of a portfolio.

The elephant in the room - higher mortgages than ever

The chairman of business research agency was recently quoted as saying, 'With average household income approaching $108,500, and the cost of an established home about $475,000 across the country, it takes 4.4 times average annual household income to fund the purchase. In 1987 it took 2.2 times average household income to buy a home, while a multiple of three is generally regarded as affordable'.

Therefore more planning ahead than ever is required for people who want to purchase their own home, setting aside a regular part of their income to build their financial position from an earlier stage.

Middle stages - Age 35 to 60:

Access to cash is perhaps more important over this time. For example, people with a family or mortgage would face more financial pressures if they are not able to work for a period of time. Often an offset account on a home loan provides the balance between good access to cash, and a good return (equal to the saving on their interest repayments.)

These times see people starting to move toward retirement (at the end of this period). This means that they will start to draw on their income, so it makes sense to build up some defensive assets in the 5 to 7 years prior to retirement.

As you get toward the end of this period, say 10 years from expected retirement, building up your exposure to the more 'liquid' (easily sold) growth assets that can easily be sold if needed makes good sense. Shares, listed property trusts and overseas shares can be used to build a diversified portfolio of growth assets that can easily be quickly converted to cash if needed.

Direct property on the other hand, which requires borrowing and is less liquid, is less attractive in the run up to retirement. It is still a legitimate growth asset, however is probably best tackled more than 10 - 15 years from retirement.

Age 60 + - Retirement:

The most common mistake I see with people at retirement is that they shift all their assets to defensive assets like cash and term deposit accounts. While this takes all the volatility out of the portfolio, it means that it has a lower expected return. For a person retiring at age 60, they might be retired for 40 years.

Also, we know that inflation will increase the price of goods and services over time and defensive assets don't provide for growth in income over time. Over 40 years we would expect the costs of goods and services to more than double.

Growth assets do provide income streams that grow over time. Share dividends tend to grow over time, rent received from a rental property increases over time and listed property trusts increase their distributions over time. This is very powerful in that it helps the income from a portfolio to keep up with inflation.

Case Study

Income planning is a great way to think about retirement assets. Let's consider a person with $200,000 in assets at retirement. They draw on those assets at $10,000 a year and they also receive some age pension.

What they can do is put away 6 years of income, $60,000, into fixed interest and cash investments. That way they know that they have all their income needs for the next 6 years in low volatility defensive investments. The rest of their portfolio, $140,000, can be invested in higher expected return, but volatile, investments like shares and property assets. These investments will be paying income in the form of dividends and distributions, and will top up the cash over time. That way the volatility in the $140,000 is less important for the investor, because they have 6 years of income requirements carefully set aside in low volatility investments.