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Capital Preservation and Income

The Capital Preservation and Income strategy seeks to generate interest income while preserving the principal value of your investment. To do this, we create a “laddered” bond portfolio. By laddered, we mean the portfolio is divided into bond “rungs” with maturities beginning at one year, and then moving farther out in succeeding yearly intervals. The furthest rung out is a five year bond. The principle from each bond that matures is reinvested at the back end of the ladder (five years). Interest payments can either be distributed to you or reinvested into the ladder, based on your need for income from the account.

By laddering a bond portfolio, rather than investing exclusively in a single maturity, risk and reward are optimized. As mentioned above, bond rungs mature every year, and are then reinvested at the back end of the portfolio at the current market interest rate. Therefore, if interest rates and inflation go up, you have the opportunity to reinvest at the higher rate, thus maximizing your returns, and minimizing the risk of a decrease in the market value of your portfolio. A non-laddered portfolio, on the other hand, loses value and does not increase the amount of interest you receive if interest rates and inflation rise. If, conversely, interest rates decline, a laddered portfolio will continue to benefit from the higher interest rates locked in at the back end of the ladder.

We generally use insured certificates of deposit (CDs,) US government obligations, and investment grade corporate credits to construct laddered bond portfolios for retirement accounts like IRAs or pension accounts, while utilizing investment grade municipal bonds in non-tax advantaged accounts to maximize after tax returns. We do independent research on the bond issuer to gain maximum confidence that they have adequate cash flow and marketable assets to insure payment of the interest and principal of the bond.


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