When you’ve worked hard to accumulate wealth, you don’t want to have to re-earn it. Balancing capital preservation vs growth is a key asset allocation concept for weathering investment volatility.
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.
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 a shallow hole.
So let me give you an example. Let’s say a client has a dollar and let’s say that client has a volatile portfolio, maybe mostly stocks. And those stocks fall by half. When a stock falls by half from a dollar to 50 cents, what percentage does the client need to come back to a dollar? Well, they need 100%. They need a double. And that’s only to come back to even.
Another way to state that is that investment volatility does cost money. Now we need some volatility to achieve some growth. 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 money.
Laura, the founder of LWP, is a Senior Wealth Manager, Chief Investment Officer and Shareholder. She has a master’s degree in tax and is an excellent listener. While she is a sophisticated financial planner with experience in complex issues, her priority is ensuring a financial plan works for people.
