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Wealth Preservation 2012


Mark Twain once said, “I’m more concerned about the return of my money than the return on my money.”


As true as that statement may have been in the 19th century, it is certainly appropriate today. With the weakened economy showing slow signs of improvement, many are wondering how they can maintain their assets if and when they return to their peak values.


“Central to any discussion about capital preservation is to first clarify that what most people really want is purchasing power preservation,” says Frank Baldwin from The Baldwin Financial Group at UBS. “This is an incredibly important distinction. Capital preservation simply requires that you not lose money,” he says. “It’s OK to set the bar at a zero percent return. Purchasing power preservation, on the other hand, is a much taller order because it requires a positive investment return at least equal to inflation, net of any taxes associated with such return.”


According to the Bureau of Labor Statistics, which started compiling and reporting inflation data in 1913, inflation has averaged a bit more than three percent annually during the last 100 years.


“So fixed income investors really need to earn at least that on an after-tax basis each year just to maintain their purchasing power,” Baldwin says. “Assuming historical trends continue and with yields recently in the 1.65 percent range, ten-year treasury buyers aren’t preserving their capital. They’re consuming it.”


“Sure, they’ll get their principal back. It just won’t go nearly as far then as it does today. That fact, unfortunately, is what a lot of safety-seeking investors seem to be missing. Today’s peace of mind may end up coming at a very high cost tomorrow,” Baldwin says.


“As people grow older they shift gears from accumulation to maintaining and/or spending,” notes Bob Denton, a retired financial advisor who remains an active investor.


“There’s no one answer for what they can do to preserve their wealth,” he says. “Spending habits differ. It depends where they are in life and if their kids are out of the house and earning. A good place to start to get a framework of where you are in life is the mortality tables on the Internet.”


When it comes to growing a financial portfolio, Denton agrees “treasuries aren’t going to make it for you today to accumulate wealth. Short-term treasuries may preserve wealth but the best recommendation is and always has been the equities of America’s great companies,” he says. “You should be looking to own America’s great companies rather than lending to them or the federal government. Owners make more money long-term than lenders.”


Denton says some school bonds, certain California municipalities, and municipal revenue bonds are good recommendations. “Things like water and sewer — we can’t live without those so those people are going to pay,” notes Denton, who opened the Rancho Santa Fe branch of Dean Witter in 1975 and grew client capital from about $20 million to $500,000 billion before he retired in 2008.


Denton says a good way to start learning about equities is Investor’s Business Daily, available in print and online. But he adds that it is always preferable to consult an experienced advisor.     BIANCA KAPLANEK


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