Capital preservation takes on a different financial objective than traditional investing. Rather than trying to maximize the growth of your assets, capital preservation is all about maintaining the value of your assets over time. This financial goal isn't for everyone, but it is a key objective for those approaching or enjoying retirement and for younger investors saving for a down payment on a house.
You likely have different objectives for different assets. While some capital may be designed to grow quickly, other capital may be intended to hold its value over time. This is where capital preservation comes in. Preserving your capital is important if you know you will need that capital in the short-term or long-term future. Rather than using that capital to fund new ventures, you'll want to know that capital will be there in the case of an emergency or for payments you know you'll need to make down the road.
If your intention is to preserve capital rather than to grow it, you'll want to integrate that into your investment approach. For funds designed to grow, investing in an assortment of blue-chip stocks can be a great option. However, this isn't ideal for the capital you're trying to preserve. In this case, even bonds may not be favorable, as they can still fluctuate significantly over time.
When deciding how to invest capital you want to preserve, low volatility is the name of the game. Volatility is a measurement of how much securities fluctuate in value, expressed as a percentage of their original cost. You'll want to find securities that have low volatility so that your capital will fluctuate as little as possible while it is invested.
As mentioned above, blue-chip stocks and bonds are typically not ideal if your goal is capital preservation. These securities simply can fluctuate too much. Some of the classic security choices for preserving capital in the U.S. include:
Remember, the goal here is to preserve the nominal value of the cash. In these cases, your only expense should be the bank fees.
We've seen it happen time and again where some securities suddenly become popular. We tend to be wary of securities that rise in popularity quickly, especially when it comes to preserving capital. In the case of a recession, securities can quickly become devalued, and if your assets were invested in those securities, they could lose their value too.
If your goal is to preserve capital, it's okay to accept a 0% return on investment or even slightly negative. Don't forget that the goal is to maintain the nominal value of the capital, not to grow it.
When it comes to managing your wealth and planning for the future, there are many roads to take. At Finley Davis, we strive to help you find the best path forward and establish measurable goals to mark your progress. If you have any questions concerning how to invest your capital, give us a call or send us a message to set up a consultation.