Capital preservation through growth

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As we discussed last time, it’s just not realistic to hope to stay ahead of inflation’s slow but persistent drain without assuming some risk. For investors whose first goal is to preserve capital, a growth strategy is the appropriate response, in our view. Here’s why.

By our definition, a growth strategy means a portfolio of diversified securities – stocks, bond, and alternative investments. A growth strategy uses both offense and defense to keep and grow capital through a wide variety of economic and political environments. A growth portfolio involves risk, which can be tuned to suit the investor by adjusting the proportion allocated to each asset class.

We feel an intentional mix of risky and less risky holdings is the best way to withstand negative investment events such as inflation, recession, and turmoil, and to capitalize on positive investment events such as economic expansion, rising profits, and reasonable interest rate returns.

Combat the silent enemies

As we discussed last time, losing purchasing power to inflation dooms any risk-free portfolio. Earning one percent a year on a CD creates a slowly rising account balance, but if inflation is running at three percent a year, the investor’s buying power falls every day of the week.

A growth strategy provides the opportunity to outpace inflation, and its unpopular cousin, a weak dollar. These silent killers never sleep. Growth investors assume some risk to overcome them.

Earn more and keep it

We also feel that a growth strategy is a smart way to practice tax efficiency, that is, keeping more of what you earn.  With growth, you don’t have to pay any gains taxes unless you sell.  Because a growth strategy entails only periodic selling to rebalance the portfolio, the slice that goes to the IRS is limited. Moreover, index ETFs – our favorite tool for portfolio construction – are designed for tax efficiency, with minimal capital gains distributions. (The largest ETF, SPY, has made no capital gains distributions in 19 years.)

More good news: dividends from the stock portion of the portfolio are currently taxed at the lowest statutory rate of 15 percent. It all adds up to keeping more of what you earn.

(Of course no investment strategy makes sense for every situation and scenario. A growth strategy typically provides some income and liquidity, but if the investor needs quick access to more than 10-20 percent of assets, the withdrawals can trigger taxes.)

If your goal is capital preservation, we suggest adopting a long-term growth mindset. A growth portfolio provides enough risk exposure to yield expected returns that beat inflation and preserve purchasing power.


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This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

An investment cannot be made directly in an index. Not all ETFs are managed with tax-efficiency as a goal. The tax performance of SPY is shown for illustrative purposes. These securities may or may not be held in client accounts.

Tax rates on dividends may change over time.



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