Many investors concerned about loss of principal sometimes avoid growth-oriented investments when building their portfolios. The result may be an unbalanced portfolio that does not help them achieve their long-term financial goals.

Whether you are saving for retirement or simply wealth-building, allocating a portion of your portfolio assets to growth investments is an important consideration in achieving investment success. Many investors are turning to the "principal guaranteed strategy" as a way to diversify their investments while achieving a balance between growth and principal protection.

The "secret ingredient" in this simple strategy is U.S. Government or government agency zero coupon bonds. By combining zero coupon bonds with growth-oriented securities, the strategy ensures the preservation of the original investment, when held to maturity, while providing portfolio diversification and the opportunity for growth.

- Zero coupon bonds for principal protection: The principal protection portion of the portfolio is typically allocated to U.S. Treasury strips. Commonly known as fed strips, these zero coupon bonds are backed by the "full faith and credit" of the U.S. Government-the highest level of credit quality available in a fixed income investment. As with most zero coupon bonds, fed strips are offered at a deep discount to their face value and pay no periodic interest over the life of the security.* Instead interest accumulates at a stated rate, compounding toward full maturity value. When fed strips are held to maturity, the difference between the discounted purchase price and their face value represents the return on the investment. The key to using zeros in this strategy is that, because they are purchased at a discount, there will be funds left over to invest in growth securities.

- Individual stocks or mutual funds for growth: The growth portion of the principal guaranteed portfolio can be allocated to growth-oriented equities or mutual funds, based on an investor's financial profile and investment goals.

As a hypothetical example, assume "Mrs. Reed" has $50,000 to invest from a lump sum distribution. With the help of her financial advisor, she structures a principal guaranteed portfolio using both zero coupon fed strips and individual stocks in the following manner:

Part A: Zero coupon bonds for principal protection. In her hypothetical portfolio, "Mrs. Reed" purchases a $50,000 face value fed strips to satisfy the zero coupon component of the portfolio. Because zero coupon bonds are purchased at a deep discount to their face value, she pays only $24,251* for the zero coupon bond portion of her guaranteed portfolio. Although no periodic interest is paid over the life of the fed strips, assume interest accumulates in this example at an assumed predetermined rate of 7.32%,* compounding toward full maturity value in ten years. As long as "Mrs. Reed" holds her strips investment until maturity (in ten years), she will receive back her $50,000, for a cost today of only $24,251.

Part B: Individual stocks for growth. Next, "Mrs. Reed" takes the remaining $25,749 from her $50,000 and invests it in a variety of individual stocks that her financial advisor recommends, satisfying the growth portion of the portfolio. She purchases a diversified portfolio of eight attractively priced growth stocks, which may have the potential to appreciate over the ten-year period.

The total cost of "Mrs. Reed's" entire portfolio would be $50,000: $24,251 for the zero coupon bonds and $25,749 for the individual stocks. Regardless of how the individual stocks perform, "Mrs. Reed" will receive her original $50,000 investment from the strips (when they are held to maturity).

Depending on your investment goals and risk tolerance, a principal guaranteed portfolio can be structured to meet your specific financial needs.

An attractive strategy for retirement accounts.

For most investors, IRAs and 401(k)s will be their primary source of income upon retirement. When funding a retirement account to ensure a comfortable retirement, investors will want to consider investments which can offer (1) preservation of capital, (2) growth, and (3) portfolio diversification. Using the principal guaranteed strategy in a retirement account enables you to achieve these portfolio objectives on a tax-deferred basis.

*Although not paid out until maturity, interest is subject to annual federal taxation as ordinary income.

Note: Yields and prices quotes are for illustrative purposes only and are subject to change.

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