In Defense Of Principal

Shifting to bonds can preserve your portfolio and provide income for retirement

When the bear market began in March 2000, Greg Kilpatrick became worried as he saw his investments steadily decline. The 27-year-old corporate lawyer at Helms Mullis one REIT, & Wicker P.L.L.C. in Charlotte, North Carolina, knew he had to do something. He didn’t like the feeling of watching his hard-earned dollars disappear with each quarterly statement.

“Greg had been investing on his own for about a year when I met him,” says Ronald Fisher, financial planner for Titan Financial Solutions in Charlotte, North Carolina. “He was heavily invested in technology stocks and had taken a lot of losses. That’s when he discovered his true risk tolerance.”

Fisher implemented a plan that added more fixed-income investments to Kilpatrick’s overall portfolio mix, thereby reducing volatility while producing income in a down market.

“We switched a lot of his investments from equity investments to a much more conservative program, where every dollar is put into a fixed-interest account. The interest that accrues is then placed into a very aggressive stock portfolio. That way, he gets some market potential, but the principal is never at risk,” explains Fisher, who has been advising Kilpatrick since August 2000.

Kilpatrick saves and invests at an impressive rate. He contributes 10% of his income into his 401(k) plan, makes regular $500 contributions to a universal life insurance policy, which he plans to use to retire, and manages a ShareBuilder (www.sharebuilder.com) account that he manages to invest on his own.

The core of his long-term investment strategy is carried out through his 401(k) and insurance policy. His restructured 401(k) breaks down as follows: 40% in the Schwab S&P 500 Select Index Fund (SWPPX), 40% in the American Funds Washington mutual A Large Value Fund (AWSHX), and 20% in the PiMco Total Return Institutional Fund (PTTRX). He also estimates he has contributed about $8,000 into his $300,000 universal life policy held with Met Life that features a separate fixed-income account that guarantees 6% interest in 2002. The interest earned on the account is reinvested into the Met Life index account, which is an aggressive small-cap stock fund.

“I’m more willing to take the safe 8% gain rather than risk going after 15%,” says Kilpatrick. “Over the next 30-year-period, I can build up principal to age 55, then make distributions from my universal life policy to live on from there.”

His Sharebuilder account has about $1,500 invested in three index funds, one REIT, one bond fund, and three individual stocks: Cisco Systems (Nasdaq: CSCO), General Electric (NYSE: GE), and BASF AG (NYSE: BF).

“I’m pretty happy,” says Kilpatrick. “Long term, this should enable me to retire at a fairly young age and maintain my financial independence.”

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