Putting the Strategy into Action

If the Principal Preservation Strategy is appropriate for you, you build a portfolio (perhaps similar to the hypothetical example given below).

It’s a two-step process:

Step 1: Choose Zero Coupon Bonds for Principal Protection.

The face amount of your zero coupon bond purchase should match the amount of your initial principal.

In other words, if you have $10,000 initial principal to invest, you would buy $10,000 face (maturity) value of “zeros.” With a 15-year time horizon, your cost might only be about $5,000, if prices are as shown below.

U.S. Treasury STRIPS are the most popular type of zero coupon bond used in this strategy because they’re backed by the “full faith and credit” of the U.S. government, guaranteeing investors full and timely payment of principal and interest when due.

Step 2: Select Stocks for Growth Potential & Diversification.

With the funds that remain after your bond purchase (in this example, about $5,000), you can buy growth investments such as stocks, equity mutual funds or equity unit investment trusts.

The benefit of the Principal Preservation Strategy is that you can do this knowing that, as long as you hold your zeros to maturity, you’ll receive all of your original principal back – regardless of how the growth vehicles perform.