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Preserve and protect

Personal Finance | Unnecessary risk leads to failed strategy

Issue: "Our long war," March 8, 2008

My last several articles explored the concept of "financial accumulation" and defended some principles for properly accumulating financial savings: diversification, goal-setting, compounding, and re-balancing. But, as in so much of the Christian life, black-and-white lessons are often hard to come by. Instead, God had graciously provided us principles from which Christians need to derive real-life lessons.

One example of the need for applying biblical wisdom from the principles of Scripture is in the concept of "capital preservation," which means that believing investors must seek to preserve and protect funds diligently accumulated for financial needs and goals.

That may sound as simple as investing in safe instruments like CDs and money market funds: Yes, a lowering of investment risk is part of preservation. But, along with protecting our capital (or "preserving" it) from the risk of investment losses, we also ought to preserve our assets from the effects of inflation and taxes.

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A portfolio of $100,000 falling in value to $80,000 can jeopardize our financial goals. So can a portfolio that sees its purchasing power decline by 20 percent. A portfolio value unnecessarily diminished by taxes also undercuts what an investor has worked hard at achieving. Inflation and taxes are part of the present economy and are likely to be with us for some time, but their effects can be contained. For example, depending on income bracket, the safe preserving of capital in a fully taxable CD may be inferior to the idea of a tax-free money market fund. As another example, perhaps an inflation-protected U.S. Treasury bond, or inflation-adjusted immediate annuity, represents a better source of income creation than traditional taxable bonds.

The most common contributor to a failed capital preservation strategy is unnecessary risk past the point of asset accumulation. While a superior rate of return is an understandable and admirable goal during the accumulation phase, I encourage you to turn down the dial of risk and volatility once those goals have been achieved. Explore with your financial advisor, or through the abundant supply of financial resources available on the web, the various vehicles available to savers and investors to keep their funds safe from volatility.

Many people have relied on the value of their homes to help meet financial obligations in recent years, only to find out as they needed to draw funds that the values of their homes have declined. A proper capital preservation strategy would have addressed this in advance of the need for capital. A significant difference exists between investors accumulating funds and investors using their funds. Make sure your portfolio properly addresses this difference. It is the biblical view of preservation.

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