The Three Legs of Investing
My business partner, Brian Paluso of HPK Provident Advisors, often talks about what he calls the three legs of investing. As Brian puts it, “In investing, there’s the liquidity leg, the income leg, and the safety of principal leg.”
The reality is, no single product or strategy can maximize all three at once. However, many investment vehicles can offer two out of the three. In a traditional portfolio composed of stocks and bonds, for example, you typically gain liquidity and the potential for growth and income—but you give up a guarantee of principal.
If you’re concerned about protecting your principal, there are ways to help mitigate that risk. While not foolproof, you can incorporate more conservative assets like shorter-duration, investment-grade bonds or money market instruments. You might also extend a portion of the portfolio further out on the yield curve to enhance income potential. The tradeoff? A reduced allocation to equities could limit your portfolio’s long-term growth.
Brian also shares another insightful perspective when it comes to risk. (Apologies for quoting him again—but he’s a smart guy with a strong grasp on financial planning.) He says, “When it comes to risk, you can retain it, reduce it, or transfer it.”
From an investment standpoint:
Retaining risk means investing in an all-stock portfolio, where you accept the likelihood of experiencing significant market drawdowns over time.
Reducing risk involves diversifying with more conservative, lower-volatility investments, like bonds or money markets, as discussed above.
Transferring risk typically involves the use of insurance-based products, such as annuities or life insurance. These products are designed to provide more certainty around principal protection and income—but that peace of mind usually comes with costs, such as fees or premiums.
Annuities, for example, can serve as an effective way to capture two legs of the stool: income and safety of principal. However, in exchange, you often give up liquidity. So, like any strategy, there are tradeoffs to consider.
Each of these approaches offers potential benefits, and the right combination depends entirely on your individual needs, goals, and risk tolerance. At HPK Provident Advisors, we sometimes use annuities to complement traditional portfolios for clients who place a high value on income and principal protection. That said, annuities are not a one-size-fits-all solution.
If you’re unsure how your current investment allocations align with your financial goals, we’d be happy to review them with you. Reach out to us at (724) 463-1331 or schedule a consultation on our website: www.hpkprovident.com.
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Disclaimer: The opinions expressed in this material are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and not a guarantee of future results. All indices are unmanaged and cannot be invested into directly. Economic forecasts may not develop as predicted.