Whether you invest in shares or bonds depends on where you are in your life cycle.

The thinking usually goes as follows: shares are more volatile than bonds, so a young investor can invest in shares because he or she can wait out fluctuations, but older investors should invest in bonds because they cannot afford to get it wrong.

From an income aspect the argument is reinforced in that interest income is usually higher than dividends (and, in Malta, taxed more favourably) and an older investor on a pension is likely to need more income than a younger one who is likely to be working and earning a salary. Older investors are also generally less concerned with the effects of inflation on their capital as they usually think in shorter time periods and "the heirs can take what's left".

These arguments generally hold, but I learnt from experience that, depending on the circumstances of the case, they should be refined to take into consideration certain other factors which I discuss below.

I got some insight into this matter, which did not fit exactly into the above reasoning of "shares for the young, bonds for the old", when I started trying to look at clients using the same disciplines which I used to look at business, in my previous work as an accountant. This may be a little simplistic but, to an accountant, a business is basically a balance sheet and a profit and loss account, powered by people.

One, therefore, has to look at the income a person is getting and at the personal assets which that person has. Furthermore, one has to look at the quality of those earnings, such as how secure they are, how stable or volatile they are.

Personal assets are much like capital in a firm. A person may have been trained in a profession or vocation, have a particular skill, or have other qualities which make him or her economically useful to someone.

A person may also have capital because he has a particular contractual agreement. For example, he might have a patent for an invention in his name or he might have a secure employment with the government which has agreed to pay him a certain sum of money per annum for certain services. This sort of contract, in Malta, produces a more stable source of income than what one can get, to take an example, from a privately-owned sweets shop.

The higher one's income, and the more stable that income is, the more the personal capital a person can be said to have.

According to recent national statistics, the average weekly wage, across various sectors and skill levels, is Lm93.43 per week, or Lm4,858 per year. Suppose this is a secure government employment and the person with this average income is a 35-year-old man who will live to retire at 65 years. At five per cent per annum, the approximate yield for long government bonds today, his capital is around Lm78,000.

What about his pension, you ask. Out of his income he has to pay mandatory social security contributions which will (hopefully) buy him a pension and medical care. As he makes commitments, such as getting married and having children, he is committing himself to certain changes in his income and expenditures and these can be capitalised too or take the form of liabilities.

The second person in our example may be a lady who owns and runs a sweet shop. She earns a similar amount but, because her income is more volatile, her capital is less.

One obvious thing the lady should look out for is not to spend so much on her shop that it exceeds the capital as notionally calculated.

With her income being rather volatile, the lady might not have a stomach for further risk by buying shares nor, probably, is it prudent for her to buy shares, whether she can stomach them or not, and this whatever her age. She had better stick to bonds.

The man in our example, on the other hand, sitting on an income stream which is comparable to a big bond, may well invest some of his savings in shares, because his income is rather secure.

So the rule of thumb of "shares for the young, bonds for the old" has been somewhat modified.

Ironically, the psychology might well go the other way with persons with a secure income stream disliking shares, while those with a more risky income stream going after them.

The pensioner can modify some of his thinking too. Once his investments are adequately supplementing his pension, he may well look at shares, especially if his pension is secure and he is in good health, and has thus adopted a longer time horizon.

Keep in mind in all this that the value of personal capital, often without our knowing it, is fluctuating all the time. A person's skill or profession may come into more or less demand. His or her pay relative to other industries or employers may vary.

Interest rates also have an effect on the value of personal capital. If nothing else changes but interest rates go up, the man in our example finds that his personal capital is less than Lm78,000.

The money triangle - investments, tax, insurance - all have a role to play to optimise one's personal capital. The less the tax suffered, the higher the capital. Important assets, including one's life, should be protected. Life insurance on the breadwinner in a young family ensures that his or her personal capital is replaced on his or her untimely death.

One should also keep in mind the effects of inflation. The higher inflation, the lower one's personal capital becomes. Renting a house rather than buying one may improve the cash one has left in his pocket but then one has to keep increasing rental payments depending on demand and supply of housing and inflation. One is also losing out on the opportunity for capital gain over one's lifetime.

One's personal capital depends on the big and small decisions one has made over his or her life and on luck. Many people know this and try to make the "best" decision, as they see it then, even though they may not know about personal capital or, if they know, it could not have been further from their mind.

Paul V. Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such. The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.

Paul V. Azzopardi, CPA, MBA, Stockbroker