How Do You Balance Growth With Capital Preservation?
To help finance professionals balance portfolio growth with capital preservation, we asked experts for their best strategies. From focusing on diversification and risk management to tailoring approaches to a client's life stage, here are the top four insights these leaders shared. These tips come from a President and a Founder, CEO, CFP® among others.
- Focus on Diversification and Risk Management
- Investment Portfolio Serves Financial Plan
- Use a Personalized Bucketing Strategy
- Tailor Approach to Client's Life Stage
Focus on Diversification and Risk Management
I focus on diversification and risk management. I allocate investments across various asset classes to spread risk and use conservative strategies for stable returns. Regularly reviewing and adjusting the portfolio ensures it aligns with both growth objectives and risk tolerance, thereby achieving a balance between maximizing returns and protecting capital.
Investment Portfolio Serves Financial Plan
Our firm specializes in financial planning for young physicians. Our perspective is the investment portfolio's only purpose is to serve the financial plan. The financial plan dictates how much money needs to be preserved by being kept in a high-yield savings or money market fund for big purchases that won't be covered by regular income. In most cases, 90-100% of everything else is invested in stock index funds for growth. The vast majority of these funds are in a 403(b), 401(k), 457(b), or Roth IRA that they can't access without a penalty for decades anyway. If something changes to where they expect to need access to money in a taxable account, we may add municipal bonds to cover expected withdrawals in the next 3-5 years if financing options are less than ideal.
Use a Personalized Bucketing Strategy
Balancing growth and protection within a client's portfolio is critical. Many people assume that once you retire or get to a certain age, growth is no longer important. I disagree, especially in periods of high inflation. Of course, every client's situation is different and should be considered with that in mind.
The first thing we do is look at the client's entire portfolio and their lifestyle needs and goals. We use technology to create a full financial picture.
Next, we look at using a bucketing strategy. We break goals down into categories of importance and match appropriate investments to each.
We like to use financial strategies that offer safety and protection for the client's essential expenses. Once we have the protection piece in place, we look to growth opportunities based on the client's needs and risk capacity.
We take a personalized approach when creating portfolios for our clients. Striking the right balance between growth and protection is essential for a successful financial plan.
Tailor Approach to Client's Life Stage
I believe in taking a tailored approach. There’s no one-size-fits-all solution because each client’s circumstances, goals, and risk tolerance are unique. What I’ve found effective is framing our strategy in the context of the client’s life stage and financial objectives.
For younger clients or those with a longer time horizon, we might lean more heavily toward growth. This might involve a higher allocation to equities, particularly in sectors poised for long-term expansion. However, I’m always mindful of incorporating elements of capital preservation, even in aggressive-growth portfolios. It’s about layering in safeguards—like diversification across asset classes and geographies—to mitigate risk while still allowing for substantial growth potential.
For clients nearing retirement or with shorter time horizons, the focus naturally shifts more toward preservation. Here, I favor investments with lower volatility, like fixed income or dividend-paying stocks, which offer stability and some level of income. However, I’m not a fan of entirely forgoing growth opportunities, even for conservative portfolios. A measured approach can still include growth assets, just at a smaller scale, ensuring the portfolio continues to outpace inflation without taking on excessive risk.
At the end of the day, it’s about continuous monitoring and rebalancing. Financial markets are dynamic, and so too must be our approach to portfolio management. By regularly reviewing the portfolio’s performance and making adjustments as needed, we can ensure it remains aligned with both the client’s growth ambitions and their need for capital preservation.
