Wealth Preservation: Growth vs. Protection

When you’ve worked hard to accumulate wealth, one of the last things you want is have to re-earn it. Laura Kuntz CPA/PFS, MBT, talks about the importance of a balance between growth and protection in your portfolio, including a demonstration of how investment volatility can cost money.

Transcript
Many times when clients come to see us, one of their key concerns after having accumulated and saved very successfully during their lives is that they don't want to have to re-earn their money. Maybe they're just a few years away from retirement, and they'd like to retire on a certain date, or maybe they've already retired, or maybe they've received an inheritance or a settlement out of divorce. But above and beyond all, they don't want to have to re-earn their money. And so we focus on many, many things to help those clients. Of course, they still need growth, and capital well invested tends to grow, so that is important to cover as well.

When we're thinking about helping our clients not to have to re-earn their money to help them think about how to protect their money, one of the first things we focus on is their investment allocation between growth and protection. And when it comes to protection, a key thing to know about investing is that it's harder to dig out of a big hole than it is to leap out of the shallow whole. Let me give you an example. Let's say a client has $1. And let's say that client has a volatile portfolio, maybe mostly stocks, and those stocks fall by half, which is what US stocks did in '08. Now, when a stock falls by half from $1 to 50 cents, what percentage does the client need to come back to $1? Well, they need 100%. They need a double and that's only to come back to even. So a way to think about that is it's much more difficult to climb out of a big whole than it is to climb out of a small hole. That's a factor in investment decision making.

Another way to state that is that investment volatility does cost money. Now we need some volatility to achieve some growth. That's the balance between how much growth and how much volatility and how much protection. So make sure that you're being very thoughtful and researching carefully, your risk versus reward or growth versus protection strategy or consulting with your financial advisor. Because that makes a very, very big difference in terms of ever having to re-earn monies.