Principal Preservation Strategy

For investors who want to achieve long-term financial goals such as retirement or college funding, common stocks have traditionally been the investment of choice. That’s because, even though past performance is no guarantee of future success, stocks have a long history of outperforming bonds and outpacing inflation.

However, individuals with concerns about preserving their principal avoid stocks, thus missing out on potential growth.

The “Principal Preservation Strategy” which combines zero coupon bonds with stocks can protect your nest egg while giving it a chance to grow.

Strategies to Preserve Capital

Say you have $10,000 to invest and a 15 year time frame. You would like to include stocks in your portfolio for growth, but you’re concerned about protecting your principal.

Based on your objectives and risk tolerance, a “principal preservation” portfolio composed of zero coupon bonds and selected stocks can be created.

The following visual example is based on the hypothetical portfolio below.

If you allocate $5,000 toward equity investments as illustrated below, you will at least break even on your $10,000 investment, even in the unlikely event that your equities decline to zero in 15 years. This is because the bonds are scheduled to return $10,000 at maturity.

However, the Principal Preservation Strategy does much more than ensure that you break even. It gives you the opportunity for growth consistent with equities’ long-term history of price appreciation.

In this hypothetical example, if your original equity investments were to have grown modestly to $15,861 (a return of 8% per year). when the bonds mature, your investment would be worth $25,861. Your actual rate of return will depend on the performance of the underlying investments in your account.

• Putting the Strategy into Action