Preservation of capital is a prudent investment strategy, the main objective of which is to preserve capital and avoid losses in a portfolio. This strategy would require investing in the safest short-term instruments, such as treasury bills and certificates of deposit.
Preservation of capital is also called preservation of capital.
Breaking capital preservation
Investors hold their funds in different types of investments depending on their investment objectives. An investor’s portfolio objective or strategy is dictated by a number of factors, including age, investment experience, family responsibilities, education, annual income, etc. These factors generally indicate an investor’s risk aversion. Common investment objectives include current income, growth and preservation of capital.
The current income strategy focuses on investing in securities that can generate returns quickly. These include securities such as high yield bonds and high dividend stocks. The growth strategy is to find stocks that focus on capital appreciation with minimal consideration for current income. Growing investors are willing to tolerate more risk and will invest in growth stocks that have high price / earnings (P / E) ratios. Another common type of investment objective for a portfolio is capital preservation.
The securities used for capital preservation present little or no risk and, in fact, lower returns than the current income and growth strategies mentioned above. Preservation of capital is a priority for retirees and those nearing retirement, as they can rely on their investments to generate income to cover living expenses. These types of investors have a limited time to recover losses if the markets are downdraft and give up any potential for high profits in exchange for the security of existing capital. Since retirees want to make sure they don’t survive their retirement savings, they generally opt for minimal risk investments such as US Treasuries, high-yield savings accounts, money market and certificates of bank deposit (CD). The majority of investment vehicles used by capital preservation investors are insured by the Federal Deposit Insurance Corporation (FDIC) up to $ 250,000. In some cases, but not in all cases, these investors may invest their money only for the short term.
A major drawback of the capital preservation strategy is the insidious effect of inflation on the rate of return on “safe” investments over extended periods. Although inflation does not have a significant impact on short-term returns, over time it can significantly erode the real value of an investment. For example, a modest annual inflation rate of 3% can reduce the real or inflation-adjusted value of an investment in 24 years by 50%. The amount you have is preserved, but in some cases the interest you earn on a savings account should not increase enough in value to compensate for the progressive loss of purchasing power resulting from even moderate inflation. Therefore, in “real” terms, you could lose value even if you have the same amount of money. For this reason, investors who use the capital appreciation strategy would be better off investing in inflation-adjusted investments, such as government-issued Inflation-Protected Treasury Bills (TIPS) American.