Capital preservation is an investment technique that encourages saving by retaining capital and preventing capital depreciation. This method takes a cautious approach to investing in secure short-term securities.
The objective of this strategy involves holding capital in low or no-risk investments to avoid losses. Keep reading to learn more about what exactly capital preservation is.
How Does Capital Preservation Work?
The term “capital preservation” refers to a conservative investing plan aiming to help you save money and cut losses. Investors seeking to follow a capital preservation approach will invest in the least risky investments.
It’s crucial to think about risk when choosing investments for a portfolio. A capital preservation strategy will be as risk averse as possible when making investment decisions. Often investments will include securities like Treasury bills and certificates of deposits.
Although some investors are willing to take on more risk in exchange for a higher yield, others may feel uncomfortable making risky investments and like to protect their assets. For those looking to take minimal risks, a capital preservation strategy might be the right choice for you.
This investing technique is often used by retirees to retain funds for when they are ready to stop working. These investors prefer to forego future gains in order to protect the safety of their existing investments.
Usually, a capital preservation portfolio will be 30% stocks and 70% bonds. However, this isn’t the only way to achieve a capital preservation portfolio and there may be a other strategies that’re better for you.
What Is Capital Appreciation?
An increase in the share price of an investment is known as capital appreciation. You can calculate it as the difference between an investment’s buying price and its sale price.
Capital preserving portfolios aim for steady increases in their investment’s capital appreciation, rather than trying to make sudden large returns.
Why Is Building Capital so Important?
Building capital is important for companies to fund the continued development of goods and services in order to make profit. Companies and investors will spend their built up capital in a variety of ways to earn additional income overtime.
As an individual, it is also important to build capital to ensure financial stability and security. On top of that once you have access to capital, you can invest it strategically to further expand on it.
What Is the Goal of Capital Preservation?
Capital preservation is also a strategy for preserving an asset’s inflation-adjusted buying power. This safeguard is in place to protect the capital you have invested into an asset and ensures that at the end of maturity on your assets, the amount of money put in will still be able to buy the same amount of goods and services.
Unlike most investing strategies, capital preservation doesn’t focus on growth but rather on protecting one’s assets to avoid losses.
Why Does Capital Preservation Matter?
The goal of capital preservation is to retain your assets or to maintain the face value of accumulated capital. Capital preservation is a great way to diversify your portfolio and to help shield an investor from market fluctuations.
Capital preservation is important especially during times of economic instability, as investing in securities like bonds and Treasury bills can help protect one’s capital and will ensure that it doesn’t depreciate.
What Are Capital Preservation Funds?
Capital preservation funds are investment vehicles that help preserve one’s capital. U.S. Treasury securities, high yield savings accounts, money market accounts, and bank certificates of deposit all are types of capital preservation funds.
How Are Capital Preservation Funds Used?
Capital preservation funds are versatile in that depending on the capital preservation vehicle you decide on, will determine how the funds can be withdrawn and under what limitations.
Typically when used for retirement, you will be allowed one withdrawal transaction from your preservation fund prior to reaching the age of 55. After age 55, the fund’s balance will become fully accessible once the account holder enters retirement.
Other funds like savings accounts or bonds will all come with their own predetermined rules for how the funds can be withdrawn to use.
Types of Capital Preservation Investments
- Treasury Bills: Treasury bills are a form of short-term financial instruments issued by the United States Treasury with maturities varying from a few days to a year, but never longer than a year. These securities are some of the best investments because they are under the United States government’s full faith and credit clause.
- Certificates of Deposit: A certificate of deposit (CD) is a form of savings account with a set period and interest rate. These are normally offered by commercial banks, and they limit the access to the money you contribute while offering higher interest rates.
- Money Market Funds: Money market funds are a form of mutual fund that allows investors to invest in a portfolio of shares that can potentially produce better returns. These funds can be geared toward individual investors, or they can be geared toward institutional investors which would demand higher minimum contributions.
- Savings Account: A savings account is a form of bank account that lets you deposit money, store it, and withdraw it while accruing interest. Savings accounts provide you with a safe way to store your savings and encourages capital preservation by paying interest.
Pros of Capital Preservation
Safety: The key to this form of investing plan is to realize that the money you’re investing is there to help you and will be of the same value or greater, when you need it. It favors a more cautious investing strategy aimed at preserving capital and preventing portfolio losses.
Saving Wealth: Capital preservation is an excellent strategy to help you save up your money over time. It’s the process of putting money away for safekeeping and allowing it to hold or increase in value. Since the money is stored as cash rather than borrowed, you will be shielded from market fluctuations.
Cons of Capital Preservation
Inflation: Inflation is the most significant drawback of capital preservation strategies. Although fixed-income assets are commonly thought to be stable, overtime inflation has the potential to disrupt the value of your assets.
Minimal Returns: Capital preservation also generally offers very low returns. This is due to the tradeoff between risks and return. As capital preservation is often risk averse, slower but steady returns can be expected.
Financial Advisors Can Help You Build Money
Capital preservation is an investment technique that encourages saving by retaining capital and preventing capital depreciation. This investment strategy focuses on shielding investors from market fluctuations rather than generating large returns.
If you are interested in capital preservation and have questions, a financial advisor can help you. They will act in your best interest and assist you with distributing your assets. You should think about consulting a financial advisor to help you build your wealth.